claw3201 australian taxation system review
TRANSCRIPT
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CLAW3201AustralianTaxationSystem
Contents W1AustralianTaxSystem......................................................................................................................9
GST—Overview......................................................................................................................................9
GST—InteractionswithIncomeTax.....................................................................................................10
GST—InternationalComparison...........................................................................................................11
IncomeTaxRates:ResidentialIndividuals...........................................................................................11
IndividualIncomeTaxRates:Issues.....................................................................................................11
IncomeTaxRates.................................................................................................................................12
TaxArbitrage—TaxRates.....................................................................................................................13
Criteriaforagoodtaxsystem..............................................................................................................13
Simplicity..........................................................................................................................................13
A“Fair”taxsystem...........................................................................................................................13
Issuesof“abilitytopay”...............................................................................................................13
Issuesof“vertical”equity............................................................................................................14
Efficiency..........................................................................................................................................14
Efficiency:businessstructure.......................................................................................................14
InternationalCompetitiveness:AcquiredGoodwill.............................................................................14
W2ResidenceandSource....................................................................................................................15
IntroductiontoITAA.............................................................................................................................15
DefinitionSections...........................................................................................................................16
NumberingSystem—order...............................................................................................................16
ITAA1997—Structure.......................................................................................................................16
Chargingsection—s.4-10(1)ITAA1997.......................................................................................16
ResidenceandSourcePrinciples..........................................................................................................16
Overview..........................................................................................................................................16
AssessableIncome...........................................................................................................................17
Residence.........................................................................................................................................17
AustralianResident......................................................................................................................18
ResidentofAustralia—Individuals...............................................................................................18
“Reside”....................................................................................................................................18
“Reside”—caselaw...................................................................................................................18
“Reside”—Factorstoconsider(para.20).................................................................................19
TR98/17...................................................................................................................................19
Example6:agree?................................................................................................................19
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Example9:consistent?.........................................................................................................19
Issues:...................................................................................................................................20
TR98/17–Expatriate..........................................................................................................20
“Reside”—ATOruling...............................................................................................................20
TemporaryResident.........................................................................................................................20
TR98/17—student.......................................................................................................................20
“Domicile”&“PermanentPlaceofAbode”......................................................................................21
PermanentPlaceofAbode—Applegate......................................................................................21
PermanentPlaceofAbode—IT2650http://law.ato.gov.au/pdf/pbr/it2650.pdf........................21
HalfYearTest...................................................................................................................................22
Source...................................................................................................................................................22
Source—CaseLaw........................................................................................................................22
Incomefromrealproperty.......................................................................................................22
SourceofPersonalServiceIncome..........................................................................................22
SourceofBusinessIncome.......................................................................................................23
WithholdingTaxonInterest,DividendsandRoyalties.....................................................................23
ConceptsofIncome—Part1................................................................................................................24
Whatis“Income”?...............................................................................................................................24
Exemptincome.................................................................................................................................24
NANEI...............................................................................................................................................25
StatutoryIncome..............................................................................................................................25
OrdinaryIncome...............................................................................................................................25
1985TaxReform..........................................................................................................................26
ConceptsofO.I.—4elements—what?Who?When?Amount?..................................................26
What?.......................................................................................................................................26
RealisationPrinciple.............................................................................................................26
Who?........................................................................................................................................26
FederalCoke.........................................................................................................................26
MacquarieBankLimited[2013]FCAFC13...........................................................................27
When?......................................................................................................................................28
Amount?...................................................................................................................................28
IncomeFromServices......................................................................................................................29
Categoriesof(ordinary)IncomebySource..................................................................................29
Incomefromprovisionofservices—Stepsofanalysis.............................................................29
FBT................................................................................................................................................29
Reconciliation...............................................................................................................................30
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IncomeFromProvisionofServices..................................................................................................30
Nexusbetweenservicesandreceipts—Hayes.............................................................................30
Nexusbetweenservicesandreceipts—Dixon.............................................................................30
Nexusbetweenservicesandreceipts—Smith.............................................................................31
BenefitsfromNon-employer—Holmes.......................................................................................31
BenefitsfromNon-employer—Payne..........................................................................................31
PaymentsforRestrictiveCovenants—HiggsvOliver...................................................................32
Conceptofincome—Part2..................................................................................................................32
IncomefromProperty..........................................................................................................................32
LeasePremium.................................................................................................................................33
LoanDiscount&Premium................................................................................................................33
Royalty..............................................................................................................................................33
IncomefromShares.........................................................................................................................34
McNeil..........................................................................................................................................34
IncomefromBusiness..........................................................................................................................35
Whatisa“Business”?.......................................................................................................................35
TR97/11.......................................................................................................................................35
Example3-significantcommercialpurposeorcharacter.......................................................36
Example5-theintentionofthetaxpayer................................................................................36
Example7-prospectofprofit..................................................................................................37
IllegalActivities.............................................................................................................................37
BusinessvHobby..................................................................................................................................37
MartinvFCT(1953)90CLR470.......................................................................................................37
SimilarjudgementinEvans(justhobby)..........................................................................................37
Stone[2005]HCA21........................................................................................................................37
Division35ITAA1997.......................................................................................................................38
Ferguson.......................................................................................................................................39
Walker:(evenonegoatisenough)FCTvWalker(1985)85ATC4179.......................................39
ExtraordinaryTransaction....................................................................................................................39
WhitfordsBeach***........................................................................................................................39
MyerEmporium...............................................................................................................................40
Westfield..........................................................................................................................................40
SaleofBusinessAssets.........................................................................................................................41
Moneymen.......................................................................................................................................41
CapitalGainTax....................................................................................................................................41
CapitalGainsTax—Overview...............................................................................................................42
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NetCapitalGain...................................................................................................................................42
Methodstatementtocalculatenetcapitalgain..............................................................................42
Step1:Calculatingcapitalgainsandlosses..........................................................................................42
CapitalGains&CapitalLosses..........................................................................................................42
CGTAsset.........................................................................................................................................46
CapitalProceeds...............................................................................................................................46
CostBase..........................................................................................................................................47
CostBaseModification.................................................................................................................48
Indexation........................................................................................................................................48
ReducedCostBase...........................................................................................................................48
Exemptions.......................................................................................................................................49
MainResidenceExemption..............................................................................................................49
MainResidenceExemption—limitations.........................................................................................50
CGT&Death.....................................................................................................................................50
Rollovers...........................................................................................................................................50
Step2—Applynetcapitallossesfromprioryears...............................................................................51
Netcapitalloss.................................................................................................................................51
Step3—Reducebythediscountpercentage.......................................................................................52
Discountcapitalgains.......................................................................................................................52
Step4—Applythesmallbusinessconcessions....................................................................................52
Smallbusinessconcessions:Div152................................................................................................52
BasicConditions:s.152-10...............................................................................................................53
SmallBusinessConcessions..............................................................................................................53
Specialrules:CGTandforeignresidents..............................................................................................53
CaseStudy............................................................................................................................................54
CaseStudy:CB/RCB........................................................................................................................54
CaseStudy:Netcapitalgain.............................................................................................................55
W7—GeneralDeductionPart1............................................................................................................55
RevisionandFeedback.....................................................................................................................55
s.8-1ITAA1997...............................................................................................................................56
Nexus:...............................................................................................................................................56
TotalHolding................................................................................................................................56
Taxpayments...............................................................................................................................57
Theftloss—Theftlossofbusinessproceeds?...............................................................................57
ExpensesonWrongdoing.............................................................................................................57
Penaltiesandfines?..................................................................................................................57
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Theftlossofillegalproceeds?..................................................................................................57
Nexus—toosoon.........................................................................................................................58
Maddalena(1971)....................................................................................................................58
SpriggsvFCT;RiddellvFCT[2009]HCA22.............................................................................58
Steele.......................................................................................................................................58
Nexus—toolate...........................................................................................................................58
TemporalNexus.......................................................................................................................58
Multiplemotives..........................................................................................................................59
“TotheExtent”—Fletcher.......................................................................................................59
PaymentstoRelatedEntities..................................................................................................59
ExpensesforCapitalGains......................................................................................................59
NegativeGearing.....................................................................................................................59
PrivateExpenses...............................................................................................................................60
Food..............................................................................................................................................60
TravellingExpenses......................................................................................................................60
TravelBetweenhomeandwork..............................................................................................60
EducationExpenses......................................................................................................................61
HomeOffice.................................................................................................................................61
Entertainment..............................................................................................................................61
MedicalExpenses.........................................................................................................................61
Clothing........................................................................................................................................62
W8—GeneralDeduction—Part2.........................................................................................................62
Revision+Feedback.........................................................................................................................62
Deductions—GeneralConcepts.......................................................................................................63
CapitalExpenses...............................................................................................................................63
s.40-880ITAA1997.....................................................................................................................63
CapitalvsRevenueExpenses........................................................................................................64
SunNewspaper............................................................................................................................64
BrokenHillTheatres....................................................................................................................65
BPAustralia.................................................................................................................................65
RegentOil.....................................................................................................................................66
PurchasePriceofCapitalAssets...................................................................................................66
CliffsInternational(1979):.......................................................................................................66
ColonialMutualLifeAssuranceSocietyLtd(1953):................................................................66
CaseAnalysis:CitylinkMelbourneLtd[2006]HCA35.....................................................................67
ATOmissedopportunities............................................................................................................67
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W9—SpecificDeductions.....................................................................................................................69
Revision+Feedback.........................................................................................................................69
SpecificDeductions..........................................................................................................................70
DeductionsSpecificallyAllowed...................................................................................................70
Tax-relatedexpenses:“managingyourtaxaffairs”:s.25-5ITAA1997.................................70
Baddebts:deductibleif:s.25-35ITAA1997..........................................................................70
Repairs:s.25-10ITAA1997.....................................................................................................70
Replacementofawholeasset:LindsayvFCT.....................................................................71
“Repair”vs“improvement”..................................................................................................71
Improvements:BPOilRefinery...........................................................................................71
Improvements:WesternSuburbsCinemas.........................................................................71
InitialRepair:W.Thomas&Co...........................................................................................71
InitialRepairs:LawShippingCoLtdvIRC(1923)................................................................72
InitialRepairs:TaxationRulingTR97/23............................................................................72
NotionalRepair:WesternSuburbsCinemas.......................................................................72
DeductionsSpecificallyDenied....................................................................................................72
Bribes........................................................................................................................................73
DepreciationforCapitalExpenditures.........................................................................................73
CapitalAllowance.............................................................................................................................73
DepreciatingAsset........................................................................................................................73
DeclineinValue........................................................................................................................74
EffectiveLife.............................................................................................................................74
Cost...........................................................................................................................................74
BalancingAdjustments............................................................................................................75
SpecialCapitalAllowanceRegimes..................................................................................................75
SmallCostAssets..........................................................................................................................75
Low-valuepool.............................................................................................................................76
ConcessionsforSBE(smallbusinessentity).................................................................................76
SBEPool....................................................................................................................................76
ProjectAmount............................................................................................................................76
BusinessRelatedCosts.................................................................................................................76
CarLimit.......................................................................................................................................77
CapitalWorksDeduction..................................................................................................................77
CapitalWorks(buildings)..............................................................................................................77
Deduction.....................................................................................................................................77
BalancingAdjustment—Destruction............................................................................................78
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BalancingAdjustment—Disposal.................................................................................................78
RalphReportrecommendation................................................................................................78
W10—TaxAccounting..........................................................................................................................78
Review+Feedback...........................................................................................................................79
Overview—taxaccounting...............................................................................................................79
AnnualAccounting...........................................................................................................................80
Cashvsaccrualbasis........................................................................................................................80
Income:“Derived”........................................................................................................................80
CashvsAccrualsBasis..................................................................................................................80
Carden’sCase...........................................................................................................................80
Henderson................................................................................................................................81
Firstenberg...............................................................................................................................81
Summary—Generalrule...............................................................................................................81
TR98/1.........................................................................................................................................81
DeemingRulesonReceipts..........................................................................................................82
CashBasis—Deduction................................................................................................................82
“Derived”..........................................................................................................................................82
RecognitionofIncome.................................................................................................................82
Ballarat........................................................................................................................................82
BHPBillitonPetroleum................................................................................................................83
ArthurMurray..............................................................................................................................83
Summary—generalrules..............................................................................................................84
“Incurred”.........................................................................................................................................84
RecognitionofDeduction.............................................................................................................84
JamesFlood..................................................................................................................................84
AccruedLeave..............................................................................................................................84
RACVInsurance............................................................................................................................84
AustralianGuaranteeCorp..........................................................................................................85
ColesMyerFinance......................................................................................................................85
CitylinkMelbourne......................................................................................................................86
Summary—generalrules..............................................................................................................86
Prepayments................................................................................................................................86
Tradingstock....................................................................................................................................86
Tradingstock................................................................................................................................86
TaxAccountingRules....................................................................................................................87
Tradingstocks“OnHand”............................................................................................................87
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ValuationofClosingStock............................................................................................................87
Non-arm’slengthacquisition.......................................................................................................87
DisposaloutsideOrdinaryCourseofBusiness.............................................................................87
TradingStockßàNon-TradingStock..........................................................................................87
TradingStockforSBE...................................................................................................................88
W11—TaxAvoidance...........................................................................................................................88
Revision+Feedback.........................................................................................................................88
TaxAvoidance..................................................................................................................................88
GeneralAnti-AvoidanceProvision–PartIVA..................................................................................89
Scheme.........................................................................................................................................90
TaxBenefit....................................................................................................................................90
8Matters......................................................................................................................................90
DominatePurpose(oftaxavoidanceTA).....................................................................................91
HighCourtCases.......................................................................................................................91
Peabody(1994)........................................................................................................................91
Spotless(1996).........................................................................................................................91
ConsolidatedPress(2001).......................................................................................................92
Hart(2004)***(demonstratepart4A)....................................................................................92
iTax:..................................................................................................................................................93
Creationofdoublenon-taxation......................................................................................................93
Thetaleofthecheck-the-boxregime..........................................................................................94
USattitudetowardsBEPS.............................................................................................................94
MAAL:s177DASchemesthatlimitsataxablepresenceinAustralia(applytogloballevel)........94
W12—Review.......................................................................................................................................94
GST—Overview.................................................................................................................................94
Incomeandresidency......................................................................................................................95
Deductions*****..............................................................................................................................95
GeneralDeductions8-1................................................................................................................96
SpecificDeductions......................................................................................................................96
Depreciation.............................................................................................................................96
TradingStock............................................................................................................................97
CGT...................................................................................................................................................97
TaxAccounting.................................................................................................................................97
Final..................................................................................................................................................97
MidtermFeedback...........................................................................................................................98
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W1 Australian Tax System Commonlawsystem,incometax,GST,interactionbetween
OECD:TaxRevenueStatistics(%oftotaltaxrevenue)
Taxes Aus NZ Jap Ger Fra UK US OECDaverage
Personalincometax 39 38 19 26 19 28 39 25
Corporateincometax 18 14 13 5 6 8 9 9
Socialsecurity - - 41 38 37 19 23 24
GST/VAT 28 38 18 28 24 33 17 33Mostofpersonalincometax(PIT)dependonpersonalcontribution,individual’sworkBothincome(personalincome,corporateincome)taxareincometax,butdifferentrates,AUSislevyingheavilyonpersonalandcorporationincometax,theyareself-assessment,AUSGSTislow
GST—Overview Commonsense,objective
RegisteredforGST
Buycupmarital,paidsb.Else—inconsumersituation;broadtest—turnover>$75,000
$11paid—paidout$1GSTtosupplier,collected$2GST—netoff,sendexcess$1orsomecaseclaim
Itisthetaxcredit,notGST
StatuteLaw:Legislapon• ACTS
CaseLaw:commonlaw• judgementusedtoexplainlegislapon(2parpesdisagree)• Onesinglelineinlegislapon(whatdoesthatmean),explainlegislapon,opinionofadminister
ATOrulings• Ministerthelaw,notjudge,notmakelaw• Lawunclear,twoparpesdispute,commissionallowornotallow• Commission'sopiniononhowthelawworks;haveexamples,pracpcalquespons
Supplier ConsumerCreditableAcquisition
Input
Tax Credit
Taxable
Supply
10% GST
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Manufacturersellcup$20,charge$22,collect$2GST,nottheirincome,$2havetosendtotaxoffice
• Turnovertax:cf.incometaxo Inputtaxcreditforbusinesso (GSTbasedonturnover>$75K)
• Taxpayer:o Supplierofgoodsandserviceso (Ultimate,burnedbytheendconsumer,chainofpeople(supplier),stopattheperson
whonotregisteredonGST)• Taxabletransactions:
o ConsumptionsofgoodsandservicesinAustraliao (Basedontaxablesupplies)
• Taxrate:o 10%onthevalueofgoodsandserviceso =One-eleventhofthepriceofthesupplyo (Exempts)
• Threetypesof‘supplies’:o Taxablesupplies(chargeGST)o GST-freesupplies(noGST)(vegetable,education,religion,butifpaidformaking
supplies,canclaiminputcredit)o Inputtaxedsupplies(noGST)(Cannotclaiminputtaxcredit,financialsupplies,
residentialrent)• GST-freesupply:canclaiminputtaxcredit
o Essentiallivingexpenses:e.g.food,health,educationandchildcareo For“competitiveness”:exports(claimGSTrefund)o Charitableactivities:e.g.religiousservices
• Inputtaxedsupply:cannotclaiminputtaxcredito Examples:financialsupplies,residentialrent
• Internationalimplications:o Import:importersofgoodssubjecttoGSTingeneral
§ Exemptions:e.g.customsvaluebelow$1,000o Export:0%ratewithrefundofinputtaxcredit
TypeofSupply: Taxablesupplies(Div9)
GST-freesupplies(Div38)
Inputtaxedsupplies(Div40)
ChargeGST NotchargeGST NotchargeGSTCanInputTaxCreditbeclaimed?
YES YES NO(exceptionforcertainfinancialsupplies)
Examples Lawfirmprovidinglegaladvice(criteria)
Food,health,education
Financialsupplies,residentialrent,preciousmetals(feeexceptions:acquisitorfinancialsuppliesmayclaimsomepart)
GST—Interactions with Income Tax • Income:
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o ExcludeGSTcomponent:s.17-5ITAA1997(GSTisnotincome)• Deduction:
o Ifentitledtoinputtaxcredits:excludeGSTcomponent:s.27-5ITAA1997(netamount,whatpaytaxon)(costnotincluded)
o Otherwise:includeGSTo (notregistered,doubleside,notbearGSTbutnotclaimablecredit;cost:11,income:
22,ifcharge22)
GST—International Comparison Country Yearofintroduction Generalratewhenintroduced Generalrate-2015 Australia 2000 10% 10% France 1968 20% 20% Germany 1968 11% 19% Japan 1989 3% 8% NewZealand 1986 12.5% 15% Sweden 1969 17.65% 25% UK 1973 8% 20% US n/a n/a n/a Listedcountry,taxregimescomparabletoAUS
Income Tax Rates: Residential Individuals TaxRate(2016-2017) TaxableIncome(brackets)0% 0—18,20019% 18,201—37,00032.5% 37,100—80,00037% 80,001—180,00045%* >180,000Differenttonon-resident*Plus2%“TemporaryBudgetRepairLevy”for2014-2015to2016-2017,resultinginatopmarginaltaxrateof49%(includingMedicarelevy)Progressivetaxrate,taxonlyonthedifferencebetweenlevelsRatedifferentondifferentincomeNon-Residenttaxratestartfrom32.5%--49%
TopMarginalRatesforEmployees(2005)(source:OECD)(wherethetopmarginalratekitsin)
Country Top marginal rate Threshold
Australia 48.5% 1.4
Canada 46.4% 2.9
Germany 44.3% 1.4
Japan 47.9% 4.5
New Zealand 39% 1.5
UK 41% 1.3
US 42.7% 10.6
Individual Income Tax Rates: Issues • 1950s:19*averageearningsàtopmarginalrate(beforethetopMRAkitsin)• 2005:onlyrequires1.4times(wagesgoup—morepeoplearecloserandclosergettingtoTMR)
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o Bracketcreep• Now?
o About2timeso Long-termsolution?o (Thehigherearn,thehighertaxbutstillgetotherbrackets)o (Balancetheproblem,mattersofbalancingthebrackets,andratescharged)o (Keepthreshold,whichbrackettoincrease?If1st—expensivetogovernment—allpeople
exemptfromthatpart)
Income Tax Rates • Medicarelevy:2%forresidentindividualsandcertaintrustees
o Increasefrom1.5%since1July2014(tofundthenationaldisabilityinsurancescheme)• TemporaryBudgetRepairLevy:2%
o Forresidentindividualswithtaxableincome>180,000;applicablefor2014-15,2015-16and2016-17incomeyears(tobringincometosurplus)
• Company:30%o Exception:28.5%forcompaniesthataresmallbusinessentities(reducedtaxrate
applicablefrom1July2015)• Trust:47%orbeneficiary’smarginaltaxrate(nottrustee)
o Excepttruststaxedascompanies• Partnership:flow-throughtreatment(taxpartnerofpartnership(allincomeflowtopartner)
o Exceptlimitedpartnership• Superannuationfunds:15%(earnings)
CorporateIncomeTaxRates(source:IBFD)
Country Corporate income tax rate
Australia 30%
Canada 26.5%
Germany 15.8%
Japan 25.5%
NZ 28%
UK 20%
US 35% 30%isnoteffectivetaxrate,dependonindustries,taxpaid/incomeearned.Havevariousexemptionsà=/=30%rate
CompanyTaxRatesofOECDCountries
Flatrate;decliningaverageenjoy30%--OKaslongasitisthetruecompany—peoplehighincome,setupcompany,divideincometocompanysetup,itiswithinspiritoflegislationHowtoavoiddecreasetobottomifrateislow—competitiveininternational2points:whatratesattractinvestment,
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balanceofmaximisetaxincome(alsodependonothercountries)
Tax Arbitrage—Tax Rates • Betweenindividualandcorporatetaxrates
o Anti-avoidancerules:e.g.(keeprightamountoftaxreceived)§ Personalservicesincomeregime§ Constructivedividendsofprivatecompanies
• Betweencountries:(crossjurisdiction)o Taxhavenso Lowtaxcountries:e.g.Ireland,Singapore(exemptmultinationalenterprises,notax
payable,multinationalcorporationsetuptaxavoidance.Trade-off)
(Taxchangepeople’sinvestmentdecisionorbehaviour—companytaxnothavebrackets;AUS:personearn7000,peoplewillnotsetupcompany)(Companyisafiction,assetsprotectionofdebtsandshareholding,shareholderwillbetaxedforthedividend(dividendcompanyalreadytaxed),ifitisloan,notdividend—0interest,0rate(distributeprofit))
Criteria for a good tax system • Criteria• Priority• (Howtotest,balanceparity/betweencriteria)
Simplicity • Certainty• Lowcompliancecost• Quiz:%ofindividualtaxpayersusingtaxagents?(todaylower—realpushtodecrease
complicity)(1stcriteria) (AUScomplexsystem,pushtosimplify)(Whyisitsometimesbad?CostlytotaxpayerandATO(smalloperation)—ifsimpler,costless—encouragepeopletopay—increasetaxrevenue,decreasetaxavoidance,increasecomply)(Bad:loopholessomegivenup,situationwillbeunfair;change—peoplewillchangetheirbehaviour/investmentdecision;trade-off)(Peoplecangetitright,costbenefittrade-off,$increaseininfrastructure,knowtopayandhowmuchtopay,decreasecostofATOcollection)
Howcomplex?(Source:“PayingTaxes2012”byWorldBank&PwC)
A “Fair” tax system • “Abilitytopay”principle:• “Horizontal”equity:personsinthesamesituationàtaxequally• “Vertical”equity:personsindifferentsituationsàtaxdifferently
(Notfair,notpay;increasebrackets,increaseprogressivetaxrate;thehigherearn,thehigherpay;peoplecanaffordhighertax—chargehigher)
Issues of “ability to pay” • Difficulttodefine
o Evenhardertomeasure
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o “Income”asproxyfor“abilitytopay”§ Whatis“income”
(Taxabilitytopay)(Whenpaymore,thehigherabilitytopaytax)• Taxpayingunit
o Individual,marriedcouple,family,closelyheldentities(Taxhowmucheverypersoncontributetosociety)(Coretaxreturnfilledinasindividuallosses)
• Timingissueo Fluctuationofincomevsannualreturn
(Cyclicalincome,incomeisnotalwaysagreatproxy)
Issues of “vertical” equity • Howmuchmoretopay?(Bracketscapture,thehigherability)• Equitybasedonamountorpercentage?(Increaseinhousevalue—howtomeasure;problem(If
notassessablee.g.increaseinmarketvalue)
Verticalequity:casestudy(question:howprogressiveratesare)(decreasedability)
Mr Income Extreme equity Progressive rates Flat rate (20%) Fixed amount
A $1,000 $950 $470 $200 $20
B $100 $50 $20 $20 $20
Efficiency • Definition:taxsystemshouldbeneutral,notaffectingtaxpayer’sbehaviour• Anydeviationfromneutrality:shouldbelimitedinscopeandtime(AspreyReport)(tax
implications)(Easytocollect,notestoppeopleinvestmentdecision)
Efficiency: business structure Businessstructure Taxrateforentity Taxrateforowner/beneficiarySoletrader N/A(taxindividualnottaxcompany) 0%-49%Company 30%(taxcompanyandshareholder,upto
progressiverate)Trust 0%-49%(trusteeorbeneficiariesbehind)(Whatisthestructure?)
International Competitiveness: Acquired Goodwill • Australia:noamortisation(notcompetitive)• Canada:75%costamortisation;upto7%p.a.(1971)• US:15-yearstraightlineamortisation(1993)• UK:followaccountingtreatment;minimum4%p.a.(2002)
(Whatishappeningaroundtheworld,everyaspect;Howtobecompetitivetootherjurisdiction)• Competitionsbetweencountries(crosstrade)(increasecentralimportant)
o Taxrates:e.g.China’s25%enterpriseincometaxrateo Taxconcessions:e.g.UK’spatentboxregime@10%o Loopholes:e.g.US’scheck-the-boxregime
• Facilitatebaseerosionprofitshifting(“BEPS”)
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o E.g.Apple’siTaxstructure(http://ssrn.com/abstract=2411297)o OECD’sBEPSProject(signtopreventdoubletax)(http://www.oecd.org/ctp/beps.htm)o CountrybyCountryReportingfrom1Jan2016(multinationalcorporation>1billion
morereports.Whatsubsidiariesare,taxadministrationcanshareinformation—whereprofitsmade,whereprofitsbooked;differentrules,arbitrageanddoublenon-taxation;globally—incomeshouldbetaxedonce;shouldnotbedoubletaxordoublenon-tax;bigfocusondoubletaxbefore,now—doublenon-tax)(https://www.ato.gov.au/law/view/pdf/cgl/lcg2015-003.pdf)
(Doubletaxagreement—betweenAUSandothercountry—whogiveuptaxtoavoiddoubletax)
W2 Residence and Source RevisionandFeedback
• ThethreesourcesofAustraliantaxationlaware(1)legislation(2)caselawand(3)ATOrulings(commissions’opinion)
• Individualsaresubjecttomarginal/progressivetaxrateswhilecompaniesaresubjecttoaflatrateof30%
• Thetopmarginaltaxratesifaresidentindividual(includingMedicarelevy)is47%• Thetaxfreethresholdforaresidentindividualis$0-18,200• The3traditionalcriteriatojudgeataxsystemare(1)Simplicity,(2)Fairness(equity)and(3)
Efficiency.(Trade-off)• 70%ofindividualtaxpayersinAustraliausetaxagents• Fairnessasataxpolicyobjectiveispremisedontheabilitytopayprinciplewhohastwo
dimensions(1)horizontalequityand(2)verticalequity.• Theefficiency(orneutrality)policyobjectivemeansthatthetaxlawshouldnotchange
investmentdecision(becauseoflaw).• Anotherpolicyobjectivethatisincreasinglyimportantinrecentyearsisinternational
competitiveness.(Countrieswanttohavecompetitiveadvantage,toattractinvestment,mayenduptaxavoidance(permittedinthelaw),loopholes)
• Medicallevyis2%oftaxableincome(ordinaryincomeàassessableincome)• TherateofGSTis10%• The3typesofGSTsuppliesareinputtaxed,GST-freeandtaxable.
Introduction to ITAA • Standardforwhat—IncomeTaxAssessmentAct• TaxLawImprovementProject(Dec1993tolate1998)
o ITAA1936&ITAA1997o SameLaw?(1936—taximprovementrewritehalf,rewrittenonein1997Act,butanumber
remainin1936,inrewritenointentiontochangelaw,justtoplainEnglish,notoverlap,operateseparate)(citethecorrectsectione.g.26(e))
• 1-3(1)ThisActcontainsprovisionsoftheIncomeTaxAssessmentAct1936inarewrittenform.• 1-3(2)If:
(a) ThatActexpressedanideainaparticularformofword;and(b) ThisActappearstohaveexpressedthesameideainadifferentformofwordsinorderto
useaclearerorsimplerstyle;• Theideasarenottobetakentobedifferentjustbecausedifferentformsofwordswereused—
overcomesstatutoryinterpretationrules(saythesamethingusingsamewords)
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Definition Sections • Definedterms“*”:s.2-10(2)&2-15ITAA1997(inthedictionary)• s.995-1ITAA1997;ApplicabletoITAA1936?:s.995-1(2)(a)(alsodictionaryin1936)• s.6ITAA1936;ApplicabletoITAA1997?:s.6(1AA)(dictionary)
Numbering System—order • ITAA1936
o s.6(1),s.6(1A),s.6(1AA)o s.6,s.6A,s.6AA,s.6AB
• ITAA:1997:logical• Numberingsystem—Complex
o E.g.s.160AQDAAITAA1936• ITAA1997triestoavoidtheproblemby:
o Format:XX-XX(divisionsseparateby-)o Gaps:alreadyoutofspace(e.g.s.165-115GA,GB,GC,etc.nextsection,spacestoputin
nextsection)
ITAA 1997—Structure • Operativevsnon-operativesections:s.2-35ITAA1997
o Guides:s.2-40(overviewofhowoperate,notstrictlyapartoflaw)§ Status:s.950-150(noneisoperative,donotciteinanywhere)
o Othermaterial(e.g.notesandexamples):s.2-45
Charging section—s. 4-10(1) ITAA 1997 • TaxEquation:IncomeTax=(Taxableincome*Rates)–TaxOffsets (progressiveorflatrate)• Taxableincome:s.4-15TI=AssessableIncome–Deductions(howmuchassessableincomeis
payable)• Applicabletaxrate(taxlawconcepts,progressiveorflat)• Taxoffsets:listins.13-1
o e.g.frankingcreditsondividends(creditfortaxowed,creditfromtaxcompanypaid),foreignincometax(overseas,notdoubletax)
o From2015-16incomeyear:smallbusinessincometaxoffset§ 5%discountontaxpayablebyindividualscarryingon(directlyorindirectly
throughpartnershipsandtrusts)smallbusinesses,deliveredasataxoffset§ Taxoffsetcappedat$1,000perindividualperincomeyear
• Taxadministration:PAYGsystem(individualàemployer,duringyearpayasyougo—endofyearreconcile)
Residence and Source Principles Overview • Abilitytopayprinciple
o Taxonworldwideincomeo Residenceprinciple(basisoflaw,whoresidencycountryis)
§ Closesteconomicandsocialtiesàresidencecountry• Residencecountry:notexclusiverighttotax(basedonabilitytopay)
o Sourcecountry:alsohasrighttotaxàsourceprinciple• Doubletaxationissue:
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o Sharetaxrevenuebetweencountries(Sourcecountryalsohaverighttotax,agreementsallocatetaxandrightsORCDmodel,similarbutnotidentical,ifamresident,paytaxwhereverincomefrom)
o Aim:totaltax=residencecountrytax§ Consistentwith“abilitytopay”principle
(Idealamount,probabilitysourcecountrytax)
Assessable Income • A.I.=O.I.+S.I.(Assessableincome=OrdinaryIncome+StatutoryIncome)• O.I.:s.6-5(sameforS.O.:s.6-10)(ordinaryincome)
o 2importantconcepts:Residenceandsource(taxbasedonwhereresidency/sourced)
• Residence:residentvsnon-resident(differenttreatment)• Since2006,anotherconcept:“temporaryresident”(treatasnon-residence)• 6-5(1)Yourassessableincomeincludesincomeaccordingtoordinaryconcepts,whichiscalled
ordinaryincome.(Assessingprovision)• 6-5(2)IfyouareanAustralianresident,yourassessableincomeincludesthe*ordinaryincome
you*deriveddirectlyorindirectlyfromallsources,whetherinoroutofAustralia,duringtheincomeyear.(Abilitytopay,ifisAUSresident,allincomefromallovertheworld)
• 6-5(3)ifyouareaforeignresident,yourassessableincomeincludes:(a) The*ordinaryincomeyou*deriveddirectlyorindirectlyfromall*Australiasourcesduring
theincomeyear;and(AUSsourcedincome)(b) Other*ordinaryincomethataprovisionincludesinyourassessableincomefortheincome
yearonsomebasisotherthanhavingan*Australiansource.
Temporaryresidents:overlay,extraconcessions,bothcanbeconsideredremainbeing
IndividualTaxRates2015-2016
Bracket($) Resident Non-resident0-18,200 0% 32.5%18,201-37,000 19%37,001-80,000 32.5%80,001-180,000 37%180,000+ 45%(plus2%TemporaryBudgetRepairLevy)Note:non-residentsnotliabletoMedicareLevyof2%
Residence • “Residence”:typicalpolicy
o Exceptions§ TheUS§ HK,Singapore&Australia(before1930)(sourcebased)(doubletaxrules)
Resident Non-Residents
Temporary
Residents
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§ Companies:sourcetaxationincreasinglycommon§ Individuals:“temporaryresident”
• 2majoroverridesofR&Sprinciples:o CGT;and(capitalgain(asset)taxnon-residentnotsubjecttoasset)o Withholdingtaxonpassiveincome(incometaxwithheldfromemployees’wageandpaid
directlytothegovernmentbytheemployer)(Ataxleviedonincome(interestanddividends)fromsecuritiesownedbyanon-resident)
Australian Resident • Definition:s.995-1ITAA1997
o AustralianresidentmeansapersonwhoisaresidentofAustraliaforthepurposesoftheIncomeTaxAssessmentACT1936
o “Person”definitionins.995-1§ Personincludesacompany(personàindividualincludecompany)
• “ResidentofAustralia”:s.6(1)ITAA1936• ResidentorresidentofAustraliameans:(4tests)
(a) aperson,otherthanacompany,whoresidesinAustraliaandincludesaperson(1sttestordinarymeaningtest)
i. whosedomicileisinAustralia,unless…permanentplaceofabodeisoutsideAustralia;(2nddomiciletest)
ii. whohasactuallybeeninAustralia,continuouslyorintermittently,duringmorethanone-halfoftheyearofincome,unless…usualplaceofabodeisoutsideAustraliaandthathedoesnotintendtotakeupresidenceinAustralia;or(3rd183-daytest,residetest)
iii. whois…amemberofthe[Commonwealth]superannuationscheme…;and(4thsuperannuation,statutoryextension)
(b) acompanywhichis…
Resident of Australia—Individuals • 4tests(differentfrommigrationlaw):
o Primarytest:“reside”(ordinary)o Supplementarytests:(statutoryextension)
§ “Domicile”&(unless)“permanentplaceofabode”§ “Halfyear”test&(unless)“usualplaceofabode”§ “Superannuationscheme”test
“Reside” • Primarysourceoftaxlaw(legislation)
o Meaningof“reside”?(Generalmeaning,physical)o Whatfactorstoconsider?(Family)
• Canbepartyearresident(flexibletest,dailybasis,testagainwhenintenttomove)
“Reside”—case law • Secondsourceoftaxlaw(caselaw)
o Dictionary:“todwellpermanentlyorforaconsiderabletime…”o Aquestionoffactanddegree(considerallcircumstances)o Examples:(closelyrelatedgetdifferentoutcome)(simplicity—notcertain)
§ Levene(UKresidentnothavesettledplaceinotherplacesclaimasnon-resident,lessclearresidein2placesstillhavetieswithUK,untilsettlementsomewhereelse)
19
§ Lysaght(DirectorwhowanttoretireinUK,movetoIrelandthenappointedasadvisorydirector,backaweekformonth,stillresidentinUK)
“Reside”—Factors to consider (para. 20) • Home(where)• Family,businessandsocialties(friends—carefultypeofpersonalbehaviour)• Physicalpresence• Residencyhistory• Frequency®ularityofmovement(routine:comparetobackpackerormoresettled)• Purposeofpresence(becauseofbusiness,orwanttowonderaroundorsettle)• Nationality(minorimportance)
(Whichonemoreweightdependoncircumstanceofperson)
TR 98/17 • Migrant:
o CometoAustraliapermanentlyàresident(6mth,“dwell”,“considerableamountoftime”)• Ruleofthumb(thoughnotdecisive:para.18):
o Livecontinuouslyhere>6months:para.22ando Behaviourconsistentwithresidency:
§ Factors:para.20(evidencebehaviour)o Primafacieresident
Example 6: agree? 90.MariaCongiuntoisasingleItalianwomanwhohasanumberofrelativeslivinginNorthQueensland.SheisemployedasanengineerinMilan.ThroughherfamilyinAustralia,MariahasaccumulatedaportfolioofAustralianinvestments.SheusuallyvisitsAustraliaeverysecondyeartoseeherrelativesandtocheckonherinvestments.91.Asaresultofaseriousillness,Mariahasbeenadvisedbyherdoctortogiveupworkuntilshefullyregainsherhealth.SheasksafriendtoliveinherhomeinMilanwhileshespendsninemonthswithhernieceinNorthQueenslandrecuperating.InAustralia,shelivesataparticularplaceandhasregularappointmentsatthehospital,sheopensanAustralianbankaccountandassoonassheisable,sheleasesacarandjoinsthelocalItalianclub.Asplanned,shereturnstoworkinItalyafterninemonths.
Decision:resident(Misasingle,1.Giveupjobfor9mths,employmenttiesgivenup;2.RelativesAUSfamily3.Settled,notlikebackup,routine(appointinhospital)carclub—yes)
(Paragraph43:Wherethedaytodaybehaviourofindividuals,consideredovertime,isrelativelysimilartotheirbehaviourbeforeenteringAustralia,theyarelikelytoberegardedasresidinghere.EvenwhentheirbehaviourovertimeisdifferentfromtheirbehaviourbeforeenteringAustralia,theyarelikelytoberegardedasresidinghere,whenthefactsoftheirpresenceindicatearoutineestablishingtheyarelivinginAustralia.)
Example 9: consistent? 101.JanineEdgertonisaBritishnationalwhohaslongedtospendtwelvemonths'downunder'.Aftersavingforyears,shetakestwelvemonthsleavefromherworkanddepartsforAustraliaonhertwenty-fourthbirthday.Althoughshetravelswithconsiderablesavings,herintentionistospendatleastpartofhertimeworking.Shehasobtainedarestrictedworkingvisaenablinghertoworkfornomorethanthreemonthswithoneemployer.102.ThroughacontactinAustraliasheisassuredofworkinPerthforthefirstthreemonths.Afterthatperiod,shedecidestotraveltotheeastcoastviaAdelaide.ShespendsamonthinAdelaidewheresheworksfortwoweeksandcontinuesherjourneytoMelbourne.103.Oncethere,shemeetssomefriendsfrombackhome.Afterworkingforafurtherthreemonths,she
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decidestospendthebalanceofhertimeinMelbourneanduseshersavingsforlivingexpenses.Tokeepcostsdown,sheleasesahousewithtwootherfriends.AttheendofhertwelvemonthsinAustralia,shereturnstotheUnitedKingdom.
Decision:non-resident(maindifference:movingaround;employmenttimerelativetransitory)
((a)IntentionorpurposeofpresenceParagraph47.Theindividual'sintention,purposeorreasonforbeinginAustraliaassistsindeterminingwhetheranindividualresideshere:Gregory.Whileindividualsmayhavemultiplereasons,thereisusuallyamainpurposetotheirpresence.)
Issues: • Temporaryresident?• Treatyimplication?
TR 98/17 – Expatr iate • Mayberesident(para.44&45)
o Toughrules(canhavemorethan1residency,andrulesindifferentcountrydifferent)o RalphReportsuggestedtoexemptexpat’sforeignincomefor4yearso Amendmenteffective1/7/2006:
§ “temporaryresident”
“Reside”—ATO ruling • Thirdsourceoftaxlaw
o TR98/17:ResidencystatusofindividualsenteringAustralia(taxruling,cominginAUS)http://law.ato.gov.au/pdf/pbr/tr1998-017.pdf
Temporary Resident • Newconceptbasedonmigrationlaw:
Youaretemporaryresidentif:(a) youholdatemporaryvisagrantedundertheMigrationAct1958;and(b) youarenotanAustralianresidentwithinthemeaningoftheSocialSecurityAct1991;and(c) your*spouseisnotanAustralianresidentwithinthemeaningoftheSocialSecurityAct1991• cf.conceptsof“residents”&non-residents”• Both“residents”and“non-residents”canbe“temporaryresidents”
((1)residency(2)rates(3)temporaryresidency)• Effect:exemptions:Subdivision768-RITAA1997
o Foreignsourceincome(exceptemploymentincome)o CGT:Taxedlikenon-residents(exceptcertaingainsreemployeeshareschemes)
(investmentassets,onlyAUSinvestments,likenon-resident)o Withholdingtaxobligationsoninterest
TR 98/17—student Para.48&50:agree?(educationpurpose)(intentiontoresidebutnotsupplementbutnotsupplement,travelbyemploytemporary,dependoncircumstance—transitory)
(a)intentionorpurposeofpresence
48.Asettledpurpose,suchasemploymentoreducation,maysupportanintentiontoresideinAustralia.However,theintentionmustbemorethanmerelybeingatravellerorvisitorwhomaysupplementtheirsavingsbyobtainingcasualemployment.50.However,individualswhoenterAustraliatotakeupprearrangedemploymentopportunitiesor
21
coursesofstudymayberesidinghereiftheirstayisconsistentwithlivinginAustralia.Miesegaesv.CommissionersofInlandRevenue(1957)37TC493concernedanindividualwhowasintheUnitedKingdomforeducationalpurposes.ItconcludedthatresidenceintheUnitedKingdomwasnotonlyapartof,butthecentralandessentialfeatureduringthatphaseoftheappellant'slife.
Example2:whatifleasesaflatandfamilycomesoverandlivetogether?
73.MichaelDesmondisaSouthAfricandiamondcorporationexecutive.HetakestheopportunitytoparticipateinanintensiveeightmonthadvancedmanagementdevelopmentprogramatanAustralianuniversity.74.Michael'swifeandchildrendonotaccompanyhimtoAustraliaandwhileherehestaysinbasicaccommodationoncampus.Hespendshistimestudyingorwritingreportsforhiscompany.HeisinAustraliasolelytodothecourseandattheendofeightmonthshereturnshome.
Decision:non-resident(firstintentionnon-resident,doresearch,notreside,family,nothingdotointegrateinAUS,heisnothavingsociallifeinAUS,intentionnottobeconnectedwithAUS)
Example10:contradictexample2?
105.DipakNeviottisastudentfromIndiawhocomestoAustraliatostudyforafouryearbachelordegreeincivilengineering.Dipaklivesinrentalaccommodationneartheuniversitywithfellowstudentsandworkspart-timeattheuniversitysocialclubasabarman.Aftersixmonths,hehastowithdrawfromhisstudiesandreturntoIndiabecausehisfatherisill.
Decision:resident(getjob,sociallinks(notassumefact,beclear:ifXXcaselookatthat)moreintegratedinAUS,morelikelyresideinAUS.
“Domicile” & “Permanent Place of Abode” • “Domicile”:theplacewhereapersonisdeemedbylawtohavehis/herpermanenthome
(nationality—considerselfdeemtohavehomebylaw)o Domicileoforigin=father’sdomicileat(your)birth(domicileoforiginunlesschoice)o Domicileofchoice=requirebothactandintentiontotakeupanewjurisdictionas
permanenthome(intentionallyandconsider)• “Domicile”vs“residence”:distinctconceptsinlegalnatureandpurpose:
o Xcanhavetworesidences,butonlyonedomicileo Equally,Xmayhavenoresidence,butmusthaveadomicile(alwaysget1domicile)
Permanent Place of Abode—Applegate • Fact:
o Employeepostedoverseasindefinitelyo EmployeeexpectedtoreturntoAustraliao TerminatedhisleaseofflatinAustraliao Familyaccompaniedhim
• Decision:(notre-announcedomicilesostilldomicileinAUS;notwanttobreakties,butPPAoutsideAUSsonotresident)(intention:stayinothercountry)
• Held:o “Permanent”àdoesnotrequiretobe“forever”(otherwise,sameas“domicile”)o PermanentplaceofabodeoutsideAustralia,thoughdomicilestillinAustralia(not
resident)
Permanent Place of Abode—IT 2650 http://law.ato.gov.au/pdf/pbr/it2650.pdf • Ruleofthumb(para.25):(oldformofruling)
22
• >2yearsabroadàpermanentplaceofabodeoutsideAustralia(unlikelytoberesident)• Notconclusive
Factor(a)-lengthofoverseasstay
25.Clearly,thelongeranindividual'sstayinanyoneparticularplace,themorepermanentinnatureandqualityofuseislikelytobethestayinthatplaceofabode.Anindividual'sintentionregardingthedurationoftheoverseasstayandthelengthoftheactualstayareonlyrelevantfactors.WhereataxpayerleavesAustraliaforanunspecifiedorasubstantialperiodandestablishesahomeinanothercountry,thathomewillrepresentapermanentplaceofabodeofthetaxpayeroutsideAustralia,subjecttoaconsiderationoftheotherfactorslistedinparagraph23above.Asabroadruleofthumb,aperiodofabout2yearsormorewouldgenerallyberegardedbythisOfficeasasubstantialperiodforthepurposesofataxpayer'sstayinanothercountry.Itmustbestressed,however,thatthedurationofthetaxpayer'sactualorintendedstayoutofAustraliaisnot,ofitself,conclusiveandneedstobeconsideredwithallofthefactorsinparagraph23above.
Half Year Test • MayneedtocountHOURSinmarginalcases:WilkievIRC(1952)32TC495(183dayunless)• “Usual”:lessstringentthan“permanent”(striketest)• Residentforwholeyear*****• Workthroughonebyone,ifnotsatisfyall4,notresident
Source • Nogeneralruleintaxlaw
o Specificprovisionforlimitednumberofitemso e.g.naturalresourceincome:s.6CAITAA1936
Incomederivedbynon-residents,whichiscalculatedbasedonthevalueofquantityof“naturalresourcesproduced,recoveredorproducedandrecovered,inAustralia”àdeemedAustraliasource.
• Caselaw:o “apractical,hardmatteroffact”:NathanvFCT(1918)25CLR183
Sometypesofincome:
o Incomefromrealpropertyo Personalexertionincomeo Businessincomeo Dividendso Interesto (Differentrulesaroundcash)
Source—Case Law
Income from real property o Source:locationofproperty(rentalincome,sourceisproperty)
Source of Personal Service Income • CT(NSW)vCam&SonsLtd(1936)36SR(NSW)544
o Fact:§ Menemployedtoworkontrawlers(boats)§ Trawlerstravelledtovariouslocations
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o Source:§ Locationofservicesperformed(timeinAUS—incomefromthattimewasAUS
sourced)§ Apportionedincomebasedonworkingtimespentindifferentlocations
• FCTvFrench(1957)98CLR398;7AITE76o Source:
§ Decidingfactorofawagewastheplaceofperformanceofservices(tocarryonproject)
§ (wassourcedinAUS,source:servicesareperformed)§ Trueingeneralasafact,butnotavalidlegalproposition(butjustaquestionoffact)
• FCTvMitchum(1965)113CLR401;9AITR559o Fact:
§ FilmactorresidentintheUS§ HeenteredintoaperformancecontractwithaSwisscompanyforasalary§ HisservicewaslentbytheSwisscompanytoanothercompanyforafee§ HeworkedinAustraliaforabout11weeks
o Held:nosourceinAustralia(itisaboutwhoisdoingthework)o Reasons:
§ Placeofperformance:nottheonlyrelevantfactor§ Activities:businessnatureratherthanemployment§ Placeofcontract:dominantfactor§ (Allsigned/salarypaidaboard,personalisedservice,specifictoMitchum,importantis
notwhereisbeingsourced,butwhoisperforming)• FCTvEfstathakis(1979)9ATR867
o Thegreatertheskillthelesssignificantistheplaceofperformanceo (argue:contractsignedoverseanotforhimspecifically,notequaltoMitchumcase,more
importantiswherecarryout,notwhodo,whereisitismoreimportant)
Source of Business Income • CliffsInternationalIncvFCT(1985)16ATR601
o Negotiationstookplaceoverseas(parentcompanyinUS)o Theinformationusedinthenegotiationscamefromoverseaso NegotiationswereconcludedoverseasandtheexecutioninAustraliawasmerelya
formalityo (Wherenegotiationtakingplace.Determinesource:wherecompletecontract)
Withholding Tax on Interest, Dividends and Royalties • Overridesthesourcerules• (passiveincome(realproperty),interest/dividend—notrequiretohaveinteraction/presentin
AUS)• WTappliestoadividendpaidbyanAustralianresidentcompanytoanon-resident
shareholder:s.128B(1)ITAA1936• IncomeuponwhichWTispayableisnotassessableincomeandisnotexemptincome:s.128D
ITAA1936(notfilledtaxcreditform.Whenbankpayswithholdcertainamountandpayresttothem,replaceinterestincome—non-assessable)
(TheWTIisataxchargedon(interest)paidbyanypersontoorforthebenefitofaforeignperson(whichincludesindividuals,companies,etc.)fromasourcewithinAustralia.Theforeignpersonisresponsibleforthetax,butitmustbewithheldbythepersonmakingtheinterestpaymenttoor
24
forthebenefitoftheforeignperson.)(UnderthePayasyougo(PAYG)withholdingrules,youhaveanobligationtocollecttaxfrompaymentsyoumaketoemployeesandsomebusinessessotheycanmeettheirend-of-yeartaxliabilities.)
Concepts of Income—Part 1 Revision+Feedback
• Australia’sincometaxsystemadoptsthesourceandresidenceprinciples,insteadoftheterritorialconcept.
• AnindividualisanAustralianresidentifhe/shesatisfiesoneofthe4tests:(1)ordinaryconcepttest.(2)domiciletest;(3)183-daytest;and(4)superannuation.
• AnindividualisaresidentofAustraliaifhisDomicileisinAustralia,unlesshispermanentplaceofabodeisoutsideAustralia.
• AnindividualisaresidentofAustraliaifheisphysicallypresentinAustraliaformorethan183-daysofanincomeyear,unlesshisusualplaceofabodeisoutsideAustraliaandheisnotintendtotakearesidencyinAUS.
• ATO’srulesofthumbaremorethan6monthsfortheresidetest,andmorethan2yearsforthepermanentplaceofabodetest,buttherulesarenon-conclusive.
• AtemporaryresidententersAustraliawithatemporaryresidencyvisa.• Thesourceofincomefrompersonalservicesisthelocationofserviceofperformanceunless
specialserviceswhilethatofincomefromrealpropertyislocationofrealestate.• ThetwomajorexceptionstotheresidenceandsourceprinciplesareCGTandWithholdingtax.• Taxableincome=Assessableincome–Deduction
What is “Income”? • Assessableincome=
Ordinaryincome+Statutoryincome(whateverwritteninlaw)• Except:
o Exemptincome(notinclude)o Non-assessablenon-exemptincome:s.6-5(1),6-10(2),6-15(2)&(3)(oneoffsetloss,one
not,notpaytax,notincludedinAI)
WillnotbebothNANEIandExempt
Exempt income • Definition:s.6-20ITAA1997
o Anamountof*ordinaryincomeor*statutoryincomeisexemptincomeifitismadeexemptfromincometaxbyaprovisionofthisAct…(Contentlist,Actliterarysayexemptsellspecifically)
o Listofexemptincome:Subdivision11-AITAA1997
Ordinaryincome Statutory income
NANEI—Not assessable not exempt
Exempt income
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§ Examples:Charitableinstitutions;specificeducationandtrainingincomeo Divisions50-54(notlimitedto50-54,itisthroughoutofAct)
• Nottruly“exempt”(offsettaxlosses)(exemptionincomeoffset)o Affecttaxlosses:s.36-10ITAA1997o (AI<deduction,negativepositionàtaxlossàcarryforwardàbecomeapartofdeduction)o NANEI—NOTaffectTL
CompanyA CompanyBYear1
A.I. $100 $100TL
Deductions $(120)(taxlosses—20)20 $(120)20
NetE.I.(exemptincome) $30 $0(noEI)Year2A:10exemptincome—notusetaxlossasdeductioninyear2,E.I.offsetted
A.I. $180 $180
Deductions $(110) $(110)
Netresult $70 $50(-20carriedforward,taxlossinyear1—getdeductionof20)
NANEI • Definition:s.6-23ITAA1997
o Anamountof*ordinaryincomeor*statutoryincomeisnon-assessablenon-exemptincomeifaprovisionofthisAct…statesthatitisnotassessableincomeandisnot*exemptincome
o Examples:Subdivision11-BITAA1997§ GSTpayableontaxablesupply(isnotpartofincome,notlimitedtothat)§ Dividend/interest/royaltysubjecttowithholdingtax
o Division59ITAA1997:particularamountsofNANEI• Relationshipwithexemptincome:s.6-20(4)ITAA1997:
o IfNANEI,thennotEI• Notaffecttaxloss:genuine“exempt”income(notaffectlossess)
Statutory Income • Definition:s.6-10(2)ITAA1997
o Amountsthatarenot*ordinaryincome,butareincludedinyourassessableincomebyprovisionsaboutassessableincome,arecalledstatutoryincome(justwhattheACTsayitis)
• ListofSI:s.10-5ITAA1997(operativesection,refertotheactualsection)o E.g.capitalgains(citereferredsection)
• ParticularitemsofSI:Division15ITAA1997
Ordinary Income • Definition:s.6-5(1)ITAA1997
o Yourassessableincomeincludesincomeaccordingtoordinaryconcepts,whichiscalledordinaryincome
• Australiancourts:(commonlaw/caselaw)o Nogeneralconceptof“income”(whatcharacteristicshave)o MostrefertoJordanCJ’swordsinScott(1935):
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§ Income“mustbedeterminedinaccordancewiththeordinaryconceptsandusageofmankind”
§ Examples:businesssalary,interest,dividend,whatordinaryeverydaypersonconsiderasincome(Capitalgain:statutoryincome)
• “Ordinaryconcepts”inAustralia:doesnotinclude:o Capitalreceiptso Gamblingwinningso Gifts
• Before1986,distinctionbetweencapitalgainsandincome:veryimportanto SinceCGT,stillimportant:(notaxgainregime)o e.g.pre-CGTassets,50%CGTdiscount,quarantineofcapitallosses,timingoftaxationo (ifsatisfysomerules,CGitisnotincome—notrealised,taxonrealisationvsflowing;apple
tree:apple:income,periodic,flow;tree—CG)
1985 Tax Reform • 2major“basebroadening”measures:
(1) CapitalGainsTax(“CGT”):realbroadeningofincometaxbase(CGTregime)(taxcapitalloopholes,fixproblem15-2)
(2) FringeBenefitsTax(“FBT”):notrealbroadening;instead,aimedtoreplacetheoldineffectives.26(e)ITAA1936(replaced,shouldreferto15-2)
àcautionwhenreadingtaxcases
Concepts of O.I.—4 elements—what? Who? When? Amount?
What? • Xholdsancapitalasset,cost=100,MV=120,stillhold,MVincrease.Any“income”forMr.X?• Realisation—Incomeasaflow• UnderHaig-Simons(economists)ideal:$20is“income”;I.e.“economicgain”concept• However,evenSimonsagreedthat“income”wouldunlikelybetaxeduntilrealisedforpractical
reasons.Why?Notbetaxeduntilsold:(notincomefortaxpurpose)o Nocashflow(nomoneytopay)o Marketpricefluctuateo Value(howtovalue)differentpeoplehavedifferentvalue;onrealisation:sellprice.
Realisation Principle • Nottaxunrealisedgainsdueto:
o Valuationo Cashflowo MVfluctuation
• Exceptions:o Financialinstruments:TOFA,e,g,mark-to-market,fairvalue(financialinstrumentsforbig
entities,taxonongoingbasis,canbeartax)o Employeesharescheme(sharesfromemployees)
Who?
Federal Coke • Fact:(gettingthewrongtaxpayer)
o TaxpayerprocessedcoalofparentcompanyBellambiforafee(onesubsidiaryhavecoal,mineforparent,thesubsidiaryisthetaxpayerhere)(isBsubjecttotaxforsubsidiary?)
o Bellambihadasupplycontractwithcustomer
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o CustomeragreedtopayBellambi$1Mtochangecontracttermso Withtaxadvice,customerpaidtaxpayerinsteadfor“theclosureofthecompany’scoking
works”• Held:not“income”,beingcapitalreceipts(notchangenatureofincome)• Reasons:
o SummightbetaxabletoBellambi,buttheCommissionerdidnotadoptthisbasiso Courtmustdecidecharacterofreceipts“inthehandsofthetaxpayer”,insteadofBellambi
• Commissioneridentifiedwrongtaxpayero (Sub—capitalnotincome(cutdownwholetree)o B--$goviaB,B(constructivereceipt)direct$paidonbehalf,notassessable)
Macquarie Bank Limited [2013] FCAFC 13 • Undertaxconsolidation:(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2503235)
o MBL:theonlytaxpayerintheconsolidatedgroup(100%ownedconsolidatedregime—100%deemtobeonetaxpayer(consolidatedgroup),notrecognisedaseverycompany)
o But,Mongoosewouldbethetaxpayerthatwouldhavederivedthe$318Mcapitalgaino Whoshouldbethetaxpayer(“Who”isreallyimportant.)
• ATO:issued“doubleassessments”forthesameamountoftaxbenefit$318MtoMBLandMongoose.
TheMacquarieBankcaseispossiblythemoderncaseontheissue“whoisthetaxpayer.”However,itdiffersfromFederalCokeonacriticalpoint.WhiletheCommissionerfailedtoidentifythecorrecttaxpayerinFederalCoke,thereisnochancethathecouldhaveidentifiedthecorrecttaxpayerinMacquarieBank.Thisisbecause,throughthemagicoftheconsolidationregime,thecorrecttaxpayerdidnotexistatall.MacquarieBankLtdsuccessfullytookadvantageoftheconsolidationregimeandreducedanotherwisetaxablegainof$318millionto$41million.TheATOchallengedthearrangementunderPartIVA,butwasinvain.TheinteractionbetweentheconsolidationregimeandPartIVAdictatesthatthecompany–that,intheabsenceofthescheme,wouldhavemadethegainof$318million–wasnolongerataxpayerunderthedefinitionof“taxbenefit”inPartIVA.Despitethedesperateattemptofissuingduplicateassessmentswithrespecttothesame$318milliongaintotwodifferentcompanies,theCommissioner
MPGroup (USprivateequity)
Minara (listed
company,
Mongoose (Australia)
MALLC (USà
Australia)
MacquarieBankLimited (headcompany)
Acquisition cost $439M (2&3/3/2004) (cash $122M + loan $317M)
100%
36%
100%
Acquisition cost $162M (1/2003)
Holding before selling to MBL Cornersto
neinvestors
Sales proceeds for shares in Minara $480M (4/3/2004)
Consolidated group (after converting MALLC to a resident company by appointing Australian resident directors)
28
wasdoomedtodefeat,asnotaxpayercouldhaveobtaineda“taxbenefit”.Thisoutcomedefiescommonsenseandhighlightsthedifficultinteractionbetweentheenterprisedoctrine–underwhichacorporategroupistreatedasonesingleenterpriseforincometaxpurposes–andtheseparateentitydoctrinewhichtreatseachcompanyasaseparatetaxpayer,evenifthecompanyisawhollyownedsubsidiaryofanothercompany.Thispaperfirstreviewsthefactsanddecisionsofthecase.ThisisfollowedbytheanalysisoftwokeyissuesarisingfromthecasewithrespecttotheinteractionbetweentheconsolidationregimeandPartIVA:theissueof“whoisthetaxpayer”,andtheproblematicapplicationofthedefinitionof“taxbenefit”toaconsolidatedgroup.
When? • Taxaccounting
o 2keywords:§ Derived(forincome)(ifnotderiveincome,nottaxable,mustderiveordinaryincome
fordeductible)§ Incurred(deduction)
Amount? • Cash:currencyconversionrulesinDiv960ITAA1997(canpickcurrency)• Non-cash:howtovalue?(whatisthemoneyvalue)
o MV:s.21ITAA1936§ Where,uponanytransaction,anyconsiderationispaidorgivenotherwisethanin
cash,themoneyvalueofthatconsiderationshall,forthepurposeofthisAct,bedeemedtohavebeenpaidorgiven
o Supplementedbys.21AITAA1936“non-cash”businessbenefits”:§ Indeterminingtheincomederivedbyataxpayer,anon-cashbusinessbenefitthatis
notconvertibletocashshallbetreatedasifitwereconvertibletocash.• Lemonadecase:CookeandSherden(noncashconvertible,nonO.I.,butnows.21A)
o (Reason:measure,notactuallyincomeunlessusetheholiday—nobenefitifwaste;2T—convertible—deemtoconvertible,deemtocash;anti-avoidance,reason—businessmaywanttoreceivenotCE—efficientrule-d—reducetaxavoidance—equitybasis)
o InFCTv.Cooke&Sherden80ATC4140;(1980)10ATR696,thegratuitousprovisionofabenefitintheformofaholidaybyasoftdrinkmanufacturertoretailersofitsproductdidnot,ofitself,precludeitscharacterisationasthe'proceedsofabusiness'withinthedefinitionof'incomefrompersonalexertion'insubsection6(1)oftheITAA.Ifthebenefitcouldbesocharacteriseditisclearthatitwouldbeincomeinthehandsoftherecipient.AsWindeyerJsaidinScottv.FCofT(1966)117CLR514atp.524,thedefinitionof'incomefrompersonalexertion'insubsection6(1)oftheITAA:
o InCooke&Sherden,however,theFullFederalCourttooktheviewthatasthebenefitconferredontheretailerswasnot'convertibleintomoneyormoney'sworth,therewasnoreceiptofincomeaccordingtoordinaryconcepts...'See80ATCatp.4150;10ATRatp.706.Similarly,thebenefitoftheinterestfreeorlowinterestloanshereinquestion,notbeingconvertibleintomoneyormoney'sworth,couldnotbesaidtobeincomeaccordingtoordinaryconceptsnotwithstandingthatitmaybecharacterisedastheproceedsofabusiness.
o AsaresultofthedecisioninCooke&Sherdensection21Awasenacted.Itprovidesthatnon-cashbenefitsreceivedfrombusinessrelationshipsthatarenotconvertibleintocasharetreatedasiftheywereconvertibletocashandbringswithintheassessableincomenon-cashbusinessbenefits,whetherconvertibleornot,providedtheyareofanincomenature.Thatis,itprovidesthemissingcharacteristicthatwouldotherwisemakethebenefitanincomereceipt.Thesectionappliestonon-cashbusinessbenefitsprovidedafter31August1988.Accordingly,thesectionappliestobenefitsreceivedunderarrangementsthatmayhavebeenenteredintobefore31August1988,whetheronacontractualbasisornot,wherethebenefitisprovidedafterthatdate.
o Facts–Tpwasinthebusinessofdistributingsoftdrinks.Manufacturerofferedfreeholidaysifapersonwassellingtheirproduct.Therightstotheholidaywerenottransferable.
o Q–isthevalueoftheholidayassessableunders6-5ors26(e)?o Held:
§ Notordinaryincomeunders6-5becausebenefitcannotbeconvertedintocash.Section21A(seebelow)didnotexistatthetimeofthiscase.
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§ Govtintroduceds21A–non-cashbusinessbenefits.Ifreceivedanon-cashbenefitinthecontextofabusiness,deemedtobeconvertibleintocash.Thereforewillbeordinaryincomeifthiscaseweretohappentoday.
Income From Services Categories of (ordinary) Income by Source • Incomefrom:
o Provisionofservices(employeecommission)o Property(dividends,cashatbank,shares)o Businesso Compensationandperiodicreceipts(insurance)
• (DeterminewhetheritisOIornot,putincategoriesfirst)
Income from provision of services—Steps of analysis • OrdinaryIncome?• S.I.(e.g.CGT)?• FBT?• Reconciliation?
FBT • Target:
o Non-cashbenefitsderivedfromemployment(employmentloopholes.21)o e.g.car,lowinterestloan,housingandmeals,holidayandtravel(insteadofpayingcash,
reducecashcomponent)• Possiblewaystotaxfringebenefits?
o (Iflimitedonlytouseforwork,itisnotprivatepersonalbenefit,notsubjecttoFBT.)(1) Asincomeofemployee(whenemployerpay,needdeduction,deductcaramountfrom
salary)(2) Atemployerlevel:atanarbitraryrate(3) Disallowdeductionsofemployer:atemployer’sapplicabletaxrate(stillpayingcash)
• FBTregime:o Adopted(2)o Attopindividualmarginalrate+Medicarelevy—49%from1April2015to31March
2017o (highestrate,mostpeoplecarecash/property—probablyontopmarginalrate;
employerusuallydeducttaxfromsalarypackage)• Problems?
o Wrongtaxamounto Wrongtaxpayer(taxemployerlevelforemployee,non-cashbenefit)
§ Doubletaxexposureforexpatriates(othercountry—“haveyoupaid”—no,becauseemployerpaid.
• FBTOverview• FringeBenefitsTaxAssessmentAct1986
o Prescriptiveprovisionsdetermining:§ Isthereafringebenefit;(personallygetin,replacingsalary)(dictionarys.136,
subsection1)§ IsitsubjecttoFBT;(divideupintoschedules,differentsectiondifferentrules)
30
§ Howtocalculatethetaxablevalueofthefringebenefit;and(grossup,pre-taxposition,nopost)
§ HowtocalculatetheFBTliability;• Taxyear:1Aprilto31March
Reconciliation • CGT:s.118-20ITAA1997(anti-overlaprule)
o Otherprovisions:priority• Fringebenefits:
o NANEI:s.23LITAA1936o i.e.FBT:priority(anti-overlaprule,nolongertaxableunderincometax)
Income From Provision of Services • “Ordinaryconcepts”• Definitionof“incomefrompersonalexertion”:s.6(1)ITAA1936• Extendedbys.15-2ITAA1997(previouss.26(e)ITAA1636)• Yourassessmentincomeincludesthevaluetoyouofallallowances,gratuities,compensation,
benefits,bonusesandpremiums*providedtoyouinrespectof,orfororinrelationdirectlyorindirectlyto,anyemploymentoforservicesrenderedbyyou(otherbonusrelatedtoemployment)
• ScopelimitedbyFBT(ifordinaryincome,notstatutoryincome)
Nexus between services and receipts—Hayes • Fact:
o Taxpayer:employedasfinancialadvisorofRichardson(directrule)o Richardson“inaspiritofgenerosity”givesharesinhiscompanytotaxpayeras“gift”(non-
cashbenefit)o Richardsonmade“gift”inrecognitionofpastservicesandasaninducementforfuture
services• Held:notincome(gift)• Reasons:
o Gratitudeforservice:notsolemotive§ Infact,“motive…cannotbeadecisionfactorincasesofthiskind”
o Decisivefactor:whetherthereceiptswasrelatedtotaxpayer’s“incomeproducingactivities”
o (Gift—mustidentifypersonalrelationship;PersonalRelationship,alreadyrenumerated)§ Judgecouldnotestablishthisrelationship
Nexus between services and receipts—Dixon • Fact:
o TaxpayervolunteeredforservicesinWWII(topuppayments)o Formeremployermadevoluntaryregularpaymentstomakeupdifferencebetween
militarypayandhisformersalary• Held:income,butnotfrompersonalservices(getincomebutnotdoinganything)• Reasons:
o Notforservicesrendered(paidalreadyperformedinthepast)o Payments:
§ Periodicand(characteristics—satisfied—yesisincome)§ Taxpayerreliedonthemtomeetlivingexpenses
31
• Ascompensationreceiptsforsalaries(expectedtogetthem,reliedupon)
Nexus between services and receipts—Smith • Fact:
o EmployeeofWestpacreceived$570under“encouragementtoStudyScheme”o Paymentmadewhenemployeesuccessfullycompletedapprovedcoursesonbanking
• Held:taxableunders.26(e)ITAA1936(yes,itisassessable;after3appealswith9judges,withabaremajorityof5to4)
• Reasons:o Not“personal”gift(nopersonalrelationship)o Schemedesignedtoimproveefficiencyandperformanceofemployeeso Schemewas“anaspectoftheiremployment”(connectionwithemployment,though
outsidedutystatement)
Benefits from Non-employer—Holmes • Fact:
o Sailoremployedonatugo Participatedinsuccessfulsalvageoperationofasinkingship’scargoo EntitledtorewardfromownerofthesinkingshipunderthelawofAdmiralty,notunderhis
employment• Held:taxableunders.26(e)ITAA1936(yestaxable,nottaxablebecauseofemployment,but
provideservice,rewardtax,subjectto15-2)• Reasons:
o “arighttoasalvagerewardispersonaltothesalvorwhorendersthesalvageservice”o Paymentinrecognitionoftheservicesperformed
• Cf.IT167:Radio&TVCompetitionPrizes• (Nature:gambleorassessable—inscopeofbusiness;repetitive:baselifeonside—income;
scope:e.g.footballer)• Frequentflyerpoints,freeflies,non-cashbenefit;employee:FBT?
Benefits from Non-employer—Payne • “frequentflyerschemes”• TR93/2
o Valueoffreeflightstaxabletotheextentthepointsareaccumulatedfrombusinesstripso Qantas:decidedtoinitiateacourtchallenge
• Fact:o Payne:employeeofKPMG(taxadviserofQantas)o DisclosedinhertaxreturnfreeticketsusedtobringherparentsfromUKtoAustralia
• Held:notaxable• Reasons:
o Qantasprovidedfreetickets“notbecauseofPayne’semployment…butbecauseshehadbecomeentitledtoitunderQantas’ownscheme”§ S.26(e)notapplicable
• TR93/2:withdrawn(solelybetweenPayne&Qantas,notpartofemployment,notconnectedwithanyemployment)
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Payments for Restrictive Covenants—Higgs v Oliver • Fact:
o ActorcompletedfilmHenryV(keepcharacteristicsidentifiable)o Agreednottoactinanyotherfilmbyothermovieproducerfor18monthso Receivedlumpsumfortheagreemento (Promisednottodosth.;capital—cuttingdownthetree—cutoffanythingforincome)
• Held:notincome(notforherservice,herserviceswastoact,butnowpromisenottoact)• Reasons:
o Noevidencetosupportthattheagreement“wasadevice…wherebythetaxpayerobtained,ashisawardforplayingin…HenryV,afurtherremuneration”§ Capitalreceipt
o If“itwasaregularpracticewithactorstoaccept[sucha]sum”§ Income(ordinaryincident)
• NowcoveredbyCGTEventD1:s.104-35ITAA1997
Concept of income—Part 2 (Ordinaryincome—(1)personalexertion;(2)property(3)business.IdentifyOI—AIornot)
Revision&Feedback
• Assessableincome=ordinary+statutoryincome• Besidestheabovetwocategoriesofincome,theothertwotypesofincomeinAustraliaare
exemptandnon-assessablenon-exemptincome.• Johnincurred$10,000taxlossinthisincomeyear,andderived$8,000exemptincomeand
$3,000non-assessablenon-exemptincome.Hislosstobecarriedforwardtothenextincomeyearis2,000.(10,000–8,000,asdeductionnextyear)
• Ordinaryincomeisdefinedinsections.6-5ofITAA1997tobeincomeaccordingtoordinaryconcepts.
• IfJohnderives$1,000thatisbothordinaryincomeandalsotaxablefringebenefitundertheFBTregime,theamountwillbetaxedasFBTonly.(23L-precidenttoFBTtopreventdoubletaxation)
• FBTisimposedonnon-cashbenefitsandthetaxrateis49%.(taxablevalueofbenefit*grossup*FBTrate)(highestmarginalrateincluding…)
• Theclassiccaseontheissueof“whoistaxpayer”isFederalCoke.• Anamountisordinaryincomeonlyifithassufficientnexuswithasourceofincome• Thethreemainsourcesofordinaryincomeare(1)property;(2)businessand(3)personal
exertion.• IsagiftreceivedbyanemployeefromhisemployerisaChristmaspartyordinaryincometothe
employee?Answer:dependsonpersonalrelationship(absentoffact;yes:ifnopersonalrelationship;no—notOIifpersonalrelationship)
• Thecompensation(substitution)principlestatesthatanewstreamofpaymentwilltakeupthecharacteristicoftheoriginalstreamofpaymentsthatitreplaces.
• TheconceptofordinaryincomeinAustraliaingeneraldoesnotinclude(1)gambling;(2)capitalreceipts;(3)gift.
Income from Property • Incomefromuseofproperty
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o Interest(ifbankpayinterest—payfortime(whatareactuallypayingfor;timegetaccess,timelosingopportunity,timebankuse$for)(commercialproperty)
o Rento Royaltyo Dividend
• Incomefromtransferofpropertyo CGTingeneral(sell,taxsaleofcapitalassetsunderCGT)
OrdinaryI.:alsopossible(Different: (1)ongoingbasisàwhenCFcomeinoverperiodoftime(flow) (2)Realisationbasisàrightatend,notuntilsell(lumpsum))
Lease Premium (paybylesseetoinduceleasing,incommercial.Notequaltoreplacementofrent)
• Caselaw:capitalreceipt(rent)o Formoversubstance
• Legislationresponse:o CGTEventF1:s.104-110ITAA1997
§ Capitalgain=capitalproceeds(i.e.premium)lessrelatedexpenses§ i.e.wholeamounttaxedimmediately:correcttiming?(cost,premium,upfrontmade
immediatelywhenenter,notincluderent—OI)§ (MontgomeryCase:coding—income,notpremium—itistheordinarywayoperate,
commonincurred—ordinarywaytoearnincome;ordinarybusinessincome—ordinaryincome;otherwisecapital—becauseitisinducetobeincontract)(professionalfirm)
Loan Discount & Premium (Borrowlowerorpaymorethanborrowed)
• Caselaw:capitalinnature:LomaxvPeterDixono Formoversubstance
• Specificregime:o TOFA:Division230ITAA1997o (regimeonlyforbigtaxpayer,onlyapplyforfinancialarrangements)
• (changethelumpsumtospreadthem(notwhollyatend),flattingouttogainspreadovertime;ifexpecttogetgain00fainispredictedonday1)
Royalty (bringtoassessableincome;ifRoyaltyisOrdinaryIncomeàs.6-5(ordinaryincomeiss.6-5only,otherelseisstatutoryincome;ifcapitalamountàs.15-20.LeasepremiumàCGT)
• S.I.:s.15-20ITAA1997o Yourassessableincomeincludesanamountthatyoureceiveas…royaltywithintheordinary
meaningof‘royalty’…iftheamountisnotassessableas*ordinaryincomeundersection6-5.(inclusivesection)(ordinarymeaningofrevenue)
• Royaltiesshouldbepayments“madeinrespectoftheparticularexerciseoftheright…andthereforeshouldbecalculatedeitherinrespectofquantityorvaluetaken”:McCauleyo Examples:
§ Useofintellectualproperties§ Exploitationofnatureresources(mining)
• (1)right;(2)rightexercised;(3)valuemeasured(trees,canenterlandchargeasnumberoftreecut)
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Income from Shares • Dividends:s.44ITAA1936(statutoryprevailunlesscasetold,s.6-25)
o Theassessableincomeofashareholderinacompany…includes…dividends(otherthannon-sharedividends)thatarepaidtotheshareholderbythecompanyoutofprofitsderivedbyitfromanysource…(profitcompanymade—comebacktoshareholder,assessed30%onprofit)(frankingcredit—creditcompanypaid)
o (1)shareholderonrecipient(2)company(3)outofprofit• Otherreceiptsfromshares?(resident)
o FCTvMcNeil[2007]HCA5:Testcasefor>80,000taxpayers(testwhetheritisOI,otherthandividend)
McNeil • Fact:
o Taxpayer:90yearoldwidow;Amount:$576.64o Nature:
§ St.GeorgeBankcapitalreductionscheme(trytoreduceshares,canhaverightstogetpremium)
§ 1for20“SellBackRights”(i.e.putoption)atpremiumprice(19%)listedonASX§ Optionsforshareholders:(1) Exerciserightstosellbacksharesàdisposalgain(2) SellrightsonASXàdisposalgain(sell—taxedCGT,sellrights)(3) DonothingàStGeorgesoldrightsonbehalfofshareholdersandcreditedproceedsto
shareholders• Rationale:Samebenefittoallshareholders
• Decision:o Firstinstance:notincomenorCGTo Reason:
§ Gain:notoutofprofits§ CGT:Provisiontoocomplex§ “IwouldventuretosuggestthattheLegislaturewouldnothavereasonablycontemplatedthe
operationadverselytoataxpayerofcircumstancesinwhichapassivetaxpayer…wouldbecomeexposedtocapitalgainstax…”(taxwillnottaxyouifnotknowwillbetaxed)
• FullFederalCourt(2:1):dittoo Reason:
§ Gain:• Outofcapitalreductionscheme
§ Notdividendoutofprofitso CGTEventH2:not‘act,transactionorevent”inrelationtotheshare(insteadtothe
taxpayerasshareholder)• Highcourt(4:1):income(nocommentonCGT)
o Reason:§ Sellbackrights:granted“fortheabsolutebenefit”oftaxpayer§ MVofrights:income§ (Capacityofperson;capacityofshareholder;receivinginthatcapacity—
shareholder—incomefromproperty;thecapacityofpersonreceivingit—taxed)§ (ThemajoritydecisioninMcNeilwasthatthevalueofsuchrightswouldberegarded
asordinaryincomeinthehandsofthebank’sshareholdersatthetimetherightswereissued.)
35
• Principle:o Natureofincome:
§ Dependsonqualityinhandsofrecipient,nototherparties(i.e.capitalreductionscheme:irrelevant)
• Potentialapplicationtocalloptions:o Governmentresponse:s.59-40ITAA1997o Effect:m.v.ofcalloptionsatissuetime:NANEI(notassessable,notexempt)
§ i.e.preventacceleratedtaxationofunrealisedgaino Conditions:include:
§ optionissuedonexistingshareholders§ sharesheldoncapitalaccount§ sharesnotacquiredunderESS(Employeesharescheme)(bonusshares+cashfor
employee)
(greyarea—hobbyorbusiness-dependonactivitiescarryoutonregularbasis)
Income from Business What is a “Business”? • Definition:s.995-1(1)ITAA1997
o Businessincludesanyprofession,trade,employment,vocationorcalling,butdoesnotincludeoccupationasanemployee(ruleout)(“XXISEmployee”—nottalkingaboutbusiness)
• A“questionoffact”o Relevantfactors?(Weightout,whichismoreweight)o Company=person/individual,itcarryonabusiness:sth.Youdov.sth.Carryon,care
wording)• 6badgesof“trade”:FinalReportoftheRoyalCommissionontheTaxationofProfitsandIncome(UK1955)(notconclusive)
o Subjectmatterofthetrade• E.g.1Mrollsoftoiletpaper:Rutledge(massivequantity)
o Lengthofperiodofownership(ongoingbasis,repetition,regular—ifoneoff;withinscopeofbusiness,orsofew,notcarryon)
o Numberandfrequencyofsimilartransactionso Supplementarywork(workdidtosetupbusiness)o Circumstancessurroundingthesale(whatisselling—consulting/knowhow;anythinggo
withbusinessdo)o Motive(intention)
• Additionalfactors:o Organisationofactivitiesinbusinesslikemanner(keeprecords,regularbasis)o Sizeofoperation(notexcludesmallthings)o Capitalemployed(significantinvestmentincapitalassets,althoughnoincome,amounts
tosetup)
TR 97/11 • Indicatorssuggestingabusiness:(http://law.ato.gov.au/pdf/pbr/tr1997-011.pdf)
o Significantcommercialactivity(transactionatcommerciallevel)o Profit-makingmotive(***notequaltohowmuch,themoreyoudo,themorelikely,even
$1isenough)(notmeaneveryyearprofitable,inthepast,projections(sales/marketing/management)—evidence,carryalotofway)
36
o Repetition®ularityo Organisedinbusinesslikemanner(systematichedge,recordkeeping,documentation
commercial)o Sizeandscaleofoperation(thelargerthesizeandscale,themorelikelytobebusiness)o Hobby/recreation(authors,artists,notrealise,greyarea,questionoffact)
Example 3 - significant commercial purpose or character Naidaandherfamilykepttwelvechickens.Twelvewastheminimumthatshelikedtohavearound.Sheknewthatherrelativesandfriendslikedherhomegrowneggs,especiallythedoubleyolksthatwereoftenproduced.Thechickensproducedaboutsixdozeneggsperweek.OftheseNaidaandherfamilyconsumedonedozen.Shesoldtheremainingfivedozeneggstorelativesandfriends.Shefoundthataftertakingintoaccountherdirectfeedcostssheusuallymanaged,inherestimation,tomakeamodestprofitof$5.00perweek.WasNaidacarryingonthebusinessofeggproduction?
No.Eventhoughshehadrepetitionandregularityinheroperationsandwasmakingamodestgrossprofit:
• shewasnotconductingtheactivityinthesamewayasthatofacommercialpoultryfarmer;• shedidnottrytosellinacommercialmarket;• shedidnotseekthebestpriceforhereggs;• shedidnotsellchickensthatwereculledbecauseoffallingproductivity;• thescaleofheroperationsweresuchthatshecouldneverproduceanetprofit;• shehadnotconductedanyresearchintotheeggindustry;and• Shehadnotlookedatthefullcostsofproductionanddistributionindeterminingthe
commercialviabilityofherenterprise.• (A:regularbasis,consistently,repetitive,documentation,feedcost,estimateprofit,whykeep
chicken—motive—5$notjustformoneyornotreallyaboutmoney;CA:sizesmall,familyandfriend—notcommercialwaytosell)
IfNaida'sactivitieschangedsignificantlyandshe:hadconsiderablymorechickens;soldtheeggstothepublicatlargeatmarketpricesortoretaileggsellers;andestablishedbyresearchthatthislevelofactivitywasprofitableaftertakingallhercostsintoaccount;thiswouldpointtoasignificantcommercialcharacterandaprofitmotive.Shemaythenbecarryingonabusinessofeggproduction.
Example 5 - the intention of the taxpayer LindsayandLorettabought700hectaresofrundownrurallandin1980.Theyintendedtostartacattlefarmingbusiness.Overthenextfiveyearstheyspentseveralthousanddollarsonfarmmachinery.Theyusedthistocleartheland,buildroadsandmendfences.Theyalsoboughtanderectedsomefarmbuildings.Noincomewasderivedfromthepropertyuntil1986whentheystockedthepropertywith100cattle.WereLindsayandLorettacarryingonabusinessfrom1980to1985?
No,because:
• theactivitiesofLindsayandLorettafrom1980to1985wouldberegardedaspreparatorytothecommencementofbusiness;
• whilsttheyhadaclearpurposetoengageincattlefarming,theyrecognisedthatcertainthingsneededtobedonetothelandbeforetheywereabletobuythecattleandputthemontheland;
• until1986therewasnosizeorscaleoftherelevantactivityinthesensethattherewasnostock;and
• Therewasnorepetitionorregularityofactivitywithrespecttocattlefarminguntilthelandwasstocked.
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Example 7 - prospect of profit Fay'sfriendswereavidgrowersofolivetreesandweremakingasmallprofitonthesaleofoliveoiltheyproducedfromtheirolives.Faydecidedtogrowolivetreesonhermodestproperty.Sheresearchedthevarietiesandselectedthosebestforoliveoilproduction.Fayplanted50olivetreesonherproperty.Sheknewtheywerehardytreeswhichrequiredminimummaintenance.Shespenttheminimumamountoftimenecessarytocareforthetrees.Shehadspokentoherfriendsandhadcalculatedthatafterfouryearsshewouldbeabletomakeaprofitontheproductionofoliveoilfromtheolivesshepicked.Thetreesthrived.Inthefifthyearafterplanting,asizeablecropwasproduced.Fayemployedcasuallabourtopicktheolives,borrowedafriend'strailerandtooktheolivestobepressed.Shesoldthebarrelsofoliveoiltofriends,workcolleaguesandmembersofthepublicwhorespondedtohernewspaperadvertisements.Shederivedasubstantialprofitinthatyear,whichshewastoldbyherfriendsintheindustrywastypical.WasFaycarryingonabusinessofoliveproduction?
Yes.Theactivitieswerecarriedoutwithapurposetomakeaprofit,evenifnoincomewasmadeinthefirstfouryearsofoperation.Inaddition:
• Fayclearlyhadaplantomaketheactivitysucceed.Shehadconductedresearchbyconsultingfriendsintheindustryandthelocalgrowersassociation;
• Thoughtheactivitywassmallitwasorganised.Byitsnaturetheactivityrequiredminimummaintenance.Itwasnotcarriedoninanadhocmanner.Rather,itwascarriedoninamannersimilartothatofotheroliveproducers;and
• Therewasrepetitionandregularityoftheactivity.
Illegal Activities • Canillegalactivitiesconstituteabusiness?(Decision:notmatterillegal,andallowfordeduction)• ATOposition:TR93/25http://law.ato.gov.au/pdf/pbr/tr1993-025.pdf• (Drugcarryingbusiness.LaRusertaxactnottopunishcrime,stilllookatthesamefactors,not
requirehavetobelegal)
Business v Hobby • Business:proceedstaxable;expensesdeductible(assessableanddeductible)• Hobby:opposite(recreationproceedsnottaxable(assessable),expensesnotdeductible)• ATO:argueforbusinessorhobby?
Martin v FCT (1953) 90 CLR 470 • Fact:(gamblers)
o Taxpayer:regularpunter,developedpuntingsystemonracehorseso Recordeddetailsofallbetsandresults
• Issue:“business”?• Held:notbusiness(notcloselyconnectedwithhisbusiness)• Reasons:
o Just“findpleasureinbetting”(justhobby)o Amerepunter
Similar judgement in Evans (just hobby)
Stone [2005] HCA 21 • Fact:
o Worldclassjavelinthrowerandfulltimeemployeeofpoliceservice(employedasfulltime)• Received:
38
(1) prizemoney:$93,429(netofforeigntax)(2) grantsfromAcademyofSports:$27,900(3) appearancefee:$2,700and(4) sponsorships:$12,419
• (partofprofessionalspotbusinessadmitted—isbusiness—otherthingscometothepartfallintobusinessconnected)
• JoannaStone’sargument:o Notconductingabusinesso Solemotivation:desiretoexcelandrepresentAustralia
• Held:o FullFederalcourt:only(3)&(4)taxableo HighCourt:alltaxable
• Reasons:o “sport”vs“professionalsport”à”business”(turntalenttoaccount)o Sponsorship:taxpayeracceptedasassessableincomeo “theconclusionthatshehadturnedhersportingabilitytoaccountformoneyisinevitable”
(therestisallconnectedandallbusiness)o “excellenceinsport”&financialadvantage:canco-existo Counterargument?
• Effect:lossclaim
Division 35 ITAA 1997 • Targets:(“business”)
o Agriculturalandforestryschemes,hobbyfarms(preventpeopleanyonloss—offsetprofit)o “non-commerciallosses”rules:(noncommerciallossprovision)(onelossagainstincome
fromanotheractivity)o “ThisDivisionpreventslossesofindividualsfromnon-commercialbusinessactivitiesbeing
offsetagainstotherassessableincomeintheyearthelossisincurred.Thelossisdeferred.Itsetsoutanincomerequirementandaseriesofteststodeterminewhetherabusinessactivityistreatedasbeingnon-commercial.Thedeferredlossesmaybeoffsetinlateryearsagainstprofitsfromtheactivity.Theymayalsobeoffsetagainstotherincomeiftheincomerequirementandoneoftheothertestsaresatisfied,oriftheCommissionerexercisesadiscretion.Ӥ Applicabletoindividualsif
• Deduction>A.I.forthe“businessactivity”inayearunlesssatisfyingoneoftheexceptions(unlessnotapply)
§ Effect:• Deferlosses• Lossquarantine(onlyoffsetfromthatactivity)
• Exceptions:(notapply)o A.I.ofactivity>=$20,000o Profitsin3outoflast5yearso Cost/m.v.ofbusinessrealproperty>=$500,000o Valueofbusinessassets(excludingrealpropertyandcars)>=$100,000o Forprimaryproducersandartists:(encourage)
§ OtherA.I.(excludingCGT)<$40,000• Exceptionsapplyonlyif:
o AdjustedTI(includeT.I.andfringebenefits,etc.)<$250,000
39
• Commissioner’sdiscretion(e.g.start-upphase)(willbecommercialbusiness)
Ferguson • Fact:
o Navalofficerleases5cattleo Paidamanagertolookafterthemonpropertyownedbymanagero Maintaineddetailedrecordsofcattle,receiptsandpayments
• Issue:carryonabusiness?• Decision:Yes—“embarkedonacommercialactivity…conductedsystematicallyand…ina
businesslikemanner.(becauseintention—makemoney)
Walker: ( even one goat is enough) FCT v Walker (1985) 85 ATC 4179 • Thiscaseconsideredtheissueofcarryingonabusinessandwhetherornotamanwascarrying
onabusinessofprimaryproductioneventhoughhehadonlypurchasedoneanimalandhadnotmadeaprofit
• (neversuccess,memberofsociety;Yes—systematicallybusinessway,projectionplan,researcheverything,incommercialmanner)
• ThecaseofJRWalkerinvolvedfiveAngoragoats,twoofwhichdied.Whilstthescalewassmall,thecourtheldthatagoatbreedingbusinesswasbeingcarriedonbecausetherewasaprofitmakingpurposeandrepetitionandregularityinthetaxpayer'sactivities.Research,basedonauthenticatedsources,showedthataprofitcouldbemadefromthesignificantcapitalallocatedtobreedingstock.
Extraordinary Transaction (Notun-assessable,canstillbeassessableincomeeventhoughnotusuallydo)
• Possibletaximplications:o Ordinaryincome:s.6-5ITAA1997o Statutoryincome:s.15-15ITAA1997
§ Yourassessableincomeincludesprofitarisingfromthecarryingonorcarryingoutofaprofit-makingundertakingorplan
§ Exclusions:O.I.forsaleofpost-CGTassets• CGT(captured)
Whitfords Beach*** • Fact:
o Companypurchasedlandin1954(pre-CGT—completelynottaxedoncapital)o Shareholdersenjoyedaccesstofishingshacksonthebeacho Shareholderssoldallsharestopropertydevelopersin1967o Companyproceededtodevelopandsubdivideland,andchangedcompanyarticles
accordinglyo (3fishmenbuiltacompany(aperson),thecompanyisataxpayer,companyownablockof
land(buylandfornotblockview);Sellshares(pre-CGT)taxfree—newshareholdersbecameP1P2P3;Changeconstitution,Psarecarryingonpropertydevelopmentbusiness,companysellland—lotsofprofit—isitO.I.?)
o (Propertydeveloper,butitisthecompanyprofit;whenchangeconstitution,companystarttocarryonbusiness—eventhoughisolatedtransaction—YES)
• Held:Ordinaryincome• Reasons:
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o Changeofshareholdersin1967:veryimportantevent§ Ifnochange,maybecapital(becausechangeconstitution,changemindofcompany)
o Since1967,“thetaxpayerwastransformedfromacompanywhichheldlandfordomesticpurposesofitsshareholderstoacompanywhosepurposewastoengageinacommercialventurewithaviewofprofit.”
Myer Emporium • Fact:[taxeffectivefinancingscheme]
o Myerlent$80Mtoitssubsidiaryat12.5%interest(wanttoraisefunds,setupsubsidiary,makeloanstosubsidiarypayable,CFinterest—makeloanon,borrowfrombank)
o 3dayslater,assignedrighttoreceiveintereststreamfor$45Mo Taxpayerargument
§ Outsideordinaryretailerbusiness(notmoneycompany)§ Saleofcapitalasset
• Held:OrdinaryIncome• Reasons:
o Thoughoutsideordinaryscopeofbusiness,againfromextraordinarytransaction“withtheintention…ofmakingaprofit…maywellconstituteincome”(eventhoughfirsttime)
o Lumpsuminexchangeforfutureinterest:revenue(substitutetointerest—takenaturetointerest—income)
• Nowcoveredbys.102CAITAA1936(profitcommercialway)• TR92/3(http://law.ato.gov.au/pdf/pbr/tr1992-003.pdf)
o Profitfromanisolatedtransactionwouldingeneralbeincomeif(1) Profitmakingmotiveand(2) Thetransactionamountstoabusiness(transactionitselfisbusiness)
• Conceptsof“income”extendedbyMyer?o ClarifiedbyWestfieldcase(extendscopeofincome,recognise:anytimemakeprofit—
ordinaryincome)
Westfield • Fact:
o Taxpayerboughtlandintendedfordevelopmentinconjunctionwithanexistingcentreo Subsequentlysoldlandtoownerofexistingcentreonconditionthatitbeengagedto
design,buildandmanagenewshoppingcentreonthesite(O.I.orCG?)(Shoppingcentre,selloffnotdevelop)
• Held:Notincome• Reasons:
o “Itdoesnotfollowfrom…Myer…thateveryprofitmadebyataxpayerinthecourseofhisbusinesswillbeofincomenature”
o Profit-makingmotive:veryimportantfactor(carrybusinessintentiontoprofit—entertransactionandmakeprofit—OI—sameasintention)
o (Profitnotfromintentionofprofit,buylandexpectrentrevenuebutnotsell)o Landnotpurchasedforresale
§ Capitalasset(oncapitalaccount)• CGTimplication—EventA1
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Sale of Business Assets Moneymen • Fact:
o Taxpayersoldlong-termmilksupplycontract(themajorassetofthebusiness)foraseriesofpaymentsover20years
o Payments,payablemonthly,calculatedbasedprevailingmarketmilkprices(timeofenteringintotransactionisimportant)
• Held:income(innature)• Reasons:
o Taxpayer“solditscapitalassetforastreamofincome”:Egerton-Warburton,Phillipso Monthlypaymentswere“asubstitutefortheincomewhichthetaxpayercouldhave
derived…”(substitutetostream)• CGTimplication?
Capital Gain Tax RevisionandFeedback
o Whatisthecommonlawdefinitionofaroyalty?Provideanexample.Paymentsforleasesofrights(1)RightsgrantedAàB(2)Rightsexercised(3)Feechargedforgranted;Paymentmeasured(calculatedbyamounttake);e.g.righttoenterland,cutdowntree.McCauleycase
o ExplainthedifferencebetweenahobbyandabusinessOrganisedinmannerconsistentwithbusiness;businesslikeway,profitmotive(hobbydonothaveprofit-makingmotive(eggcase);frequentlyengageinactivity;size;scale
o Indeterminingwhetherabusinesshascommenced,thetaxpayermust:e.g.growappletree/sellapple,feasible?Carryonbusiness;feasibilitystudy/expectnotcarryonbusiness;notneedgenerateofrevenue;objective/enterintobycapitalinvesting(appleseeds)àatwhatpointànotpaidbutnegotiatedàifstudyresultsàyesàpointmakedecisionàpointofcommitment;tocarryonàdecidetocarryonbusinessàstarttotakefurtheraction
o ProvideanoverviewandexplaintheprinciplefromtheWhitefordsBeachcase.Fishmanbuylandinnameofcompanyàtaxpayer,holdlandincapitalaccount;developerbuysharesànotsellofland,stilllandoncapitalaccount(pre-CGT.Ifsellland—noCGT);motiveofcompanyàlookdirectorsbehindàordinaryincome,activeisprofitgeneratingactivity.
o ProvideanoverviewandexplaineachstrandofMyer’scase.Incomestreamà”lumpsum”takenature—2ndAssignmentofinteresttoCitibankisagreedbeforeloantosubsidiaryàloancreatedincomestream,createdasset,ifnotagreedahead,Citibankwillnotaccept.
o ProvideanoverviewandexplainWestfield’scase.Landforrentincomeàsellland,notmakeprofitinthewaymeantomakeit,inanotherwayàlandincapitalaccount;ifbusinessisinbuyingandsellinglandàordinaryincome.
o Areleaseincentivereceiptstypicallyordinaryincome?Explainwhy.NotOI,notrevenue;ifordinaryrecurrentàWestfieldàOI;morefrequentdoàordinaryactivityàs.6-5;caseButifoneoff,neverhappenbefore,inducethestructureoftree,notrecurrent,gettingcontract,havingtreebeingestablished
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Capital Gains Tax—Overview • Part3-1ITAA1997(Div100)Generalrules+coreprovisions(start,core+3specialrules)• Part3-3ITAA1997specialrules/topics• Assessableincome=ordinaryincome+statutoryincome(**layer,methorital—gotodivision—
category)• Netcapitalgain(notcapitalgain)isaformofstatutoryincome:s.102-5(5CGs—adduptoNCG)
(allgainandlosses,gainfromonetransaction,calculatetobeincludedinAI)• Reliesontheconceptof“CGTevent”(identify1st–hastobeCGTevent)• IntroducedinSeptember1985andthereforegenerallyappliesonlytoassetsacquiredafter19
September1985(CGTNotapply,exemption)• Problemwithpre-andpost-CGTassetsystem?(Differenceofday,inequity,notasyougo,on
realisation,preventpeoplesellasset)• Equity:favoursexistingowners;efficiency:“lock-in”;simplicity:complexlegislation• Wealthtax:adjustforinflation(increaseofwealth)
Net Capital Gain s.102-5(1):
• Assessableincomeincludesyournetcapitalgain(not100,102—operativesection,p.943)• SeemethodstatementtocalculateNetcapitalgain:4steps(section)
Method statement to calculate net capital gain Step1:calculateCG/CLfromeachCGTeventandapplycapitallossagainstcapitalgains(noterulesaboutcollectables)Permittedtoindexcostbase.However,ifindexcostbase,cannotusediscount.(netoff/notuseCLasdeduction)(adjustforinflation,adjustcostbaseforsmallergain,increasecost,onlyuseoneortheother,dependonsatisfaction)(identifyCGTevent—sectiongoto—followrulesinthatevent)Step2:Applyprioryearnetcapitallossagainstanyremainingcapitalgain(noterulesaboutcollectables)(ifnegative—carryforward—netcapitalloss,againstthisyeargain—$1000year1—against$2000year2;CLonlyoffsetagainstCG)Step3:discountanyCGthatiseligiblefordiscountifassetheldforatleast12monthsIndividuals&Trust—50%(halfofgain);complyingsuperfund—331/3%(alreadyhasconcessionalrate);company=0
(1) notcompany(2) holdasset>=12months;(%dependontypeofindividual)
Step4:ApplysmallbusinessconcessionResultstep(5):netCGincludedinassessableincome.NoteCLisnotincluded)
Step 1: Calculating capital gains and losses Capital Gains & Capital Losses • Whendoyoumakeacapitalgain/capitalloss?
o IfandonlyifaCGTeventhappenss102-20(1)• CGTevent:
o TableofallCGTevents:s104-5(notoperative,notcite,justalist,Division104,onlyforCGT;“s.104-10”—operative—mustciteifwanttorefer,allsectionisDiv.104)
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o Ifmorethan1CGTeventcanhappen,usetheeventthatismostspecifictoyoursituations102-25(1)(nogoldenrule—judgment,e.g.selloftrust—trust—rule:notgoingtaxtwice)
o CGTeventsD1andH2arelastresorto CGTeventD1takespriorityoverCGTeventH2(D1applies,flexibilityandchoice)
• TimingofCGTevent:s104-10(3)o Entryintodisposalcontracto Ifnocontract,changeofownershipo Ifseveralcontractsleadtotheacquisitionofanasset,onlythecontractthatresultsinthe
directtransferisrelevantfordeterminingthetimeofacquisitionoftheCGTasset:ElmslievFCT
o OralcontractsarerelevantforCGTpurposes(noevidence)§ Conveyanceoflandmustbeinwritingtobeenforceable:s54AConveyancingAct1919
(NSW)§ OralcontractisstillacontractforDiv109;McDonaldvFCT
CGTevent • CGTeventsarecontainedinDiv104.Commononesinclude:• Aevents–disposals(sellshares) • Cevents–endingofanasset • Devents–creationofassets• Eevents–trust• Fevents–leases• Ievents-residency• Gevents–shares(focusonresidentialcompanygrantingshares,
capitalreturnsbecauseholdshares,notdisposal)• Hevents–specialreceipts
CalculateGain/loss
• EachCGTeventhasitsownrulesincalculatingthegain/loss.Importanttofollow.
• Broadly:(get-pay)(followeach) Gain=capitalproceeds-costbase Loss=Reducedcostbase–capitalproceeds(paymorethanreceive)• Capitalgainscannotbediscountedatthisstage.However,merely
notewhichareeligible(step3—insertlaterwame)Exemptions? • Generalexemptionforassetsacquiredbefore20/9/1985(pre-CGT
asset,exemptineachCGTevent—foreachevent,asubsection104+015)
• OtherexemptionscontainedinDiv118(allaboutexemption)(proxy—toseewhatisbettermethod)
Rollover? • Sameassetrollovers:e.g.marriagebreakdown126-A• Replacementassetrollovers:e.g.Scripforscrip124-M;(different
sharesfordifferentpositionofcompany)• Sellassets,deferpayments(upgradefactory,paywhensellnew
factory—rollovertolaterpointoftime)
CGTEventA1(s.104-10)
• What:disposalofCGTasset(changeinownership).(basicsell)
• Exception:changeintrustee(legalowner,butnotdisposal)
• Timeofevent:Ifthereisacontract,whencontractenteredinto.Otherwise,whenchangeinownershipoccurs(whensellasset,notsettlementoccurs)(time—year
ExampleA1:On1July2011,BradentersintocontracttosellsharestoAngelfor$1,000.Thecostoftheshareswas$800.Settlementoccurredon17July2011.
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toputCGinto—sellofrealestate• Gain:Capitalproceeds>costbase• Loss:Capitalproceeds<reducedcostbase• Exemption:<20/9/1985(preCGT)
CGTEventC1(s.104-20)
• What:lossordestructionofCGTasset(factory)
• Timeofevent:Whencompensationfirstreceived.Otherwise,whenlossordestructionoccur
• Gain:capitalproceeds>costbase• Loss:capitalproceeds<reducedcostbase• Exemption:<20/9/1985
CGTEventC1On20July2012,bushfiresdestroyedourfactorywhichcost$100,000.Thefactorywasinsuredandwereceivedinsurancepayoutfor$30,000on1August2012.(CGTeventhappen?Time:firstreceive)
CGTEventC2(s.104-25)
• What:intangibleassetendsby:(mustbeinthoseways)o redeemedorcancelled;o Expiring;o Abandoned,surrendered,forfeited;o Option-exercised
• Timeofevent:whencontractenteredtoendasset.Otherwise,whenassetends
• Gain:capitalproceeds>costbase• Loss:capitalproceeds<reducedcostbase• Exemption:<20/9/1985
CGTEventC2Bobreceived$50,000fromenteringintoa3yearrestrictivecovenantthatpreventshimfromcompetingwithTimothy.Therestrictivecovenantendson16August2012(promisenottodo)
CGTEventC3(s.104-30)
• What:Optioninsharesordebenturesincompanygrantedbythecompanyislapse,cancelled,abandoned.AlsoappliestounitsinTrust.(option/sharesexpires)
• Timeofevent:Whenoptionends• Gain:Company/trustmakesgainifcapital
proceeds>costofgranting(whothetaxpayeris)
• Loss:Capitalproceeds<costofgranting• Exemption:Ifoptiongranted<20/9/1985
ExampleC3BigTPtyLtdgrantsoptiontoThomasfor$100consideration.Itincurredlegalcostsof$25.TheoptionsallowThomastoacquiresharesfromBigTPtyLtd.Theoptionslapsedon15August2012.(Whenends)(rightcreated,righttosue)
CGTEventD1(s.104-35)
• What:createcontractualrightorotherlegalorequitablerightinanotherentity.(Icreaterightsinanotherentity**)
• Exception:o Mustconsiderallotherevents(other
thanH2)o Right–borrowingmoney;o Rightrequiresyoutodosomething
thatisCGTevento Issuesshares/units/options
• Timeofevent:contractenteredinto• Gain:capitalproceeds>incidentalcost
(costofenterintransactions,notactuallyhaveasset,nocostbase,rightsbringassetsexist)
• Loss:capitalproceeds<incidentalcost
ExampleD2:On1August2012,Bobreceived$50,000fromenteringintoarestrictivecovenantthatpreventshimfromcompetingwithTimothy.(BobcreatedcontractualrightsforTtosuehim,BobcreatedrightsonT,receive50,000)
CGTEventD2 • What:grantinganoption(otherthan ExampleD2:
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(s.104-40) thosegrantedbyacompany/trustovertheirshares/units)
• Timeofevent:whenoptiongranted• Gain:capitalproceeds>costofgranting• Loss:capitalproceeds<costofgranting• Exemption:<20/9/1985
RaniagrantsanoptiontoAnniethatallowsAnnietopurchaseaMercedesBenzfromRaniafor$50,000.Anniepaid$1,000toRania(cost=1000ofgranting)
CGTEventF4(s.104-125)
• What:Lesseereceivesmoneytovaryorwaiveatermofthelease.
• Timeofevent:whenleasetermiswaivedorvaried.
• Gain:capitalproceeds<lease’scostbase.Proceedsreducescostbase.
• Loss:n/a• Exemption:Ifleasegranted<20/9/1985
Lesseeagreestovaryatermofthelease.Inreturn,lessorpaid$1,000tolessee.(reducetimefor4monthsforshortingtermoflease)Fàlease
CGTEventF5(s.104-130)
• What:lessorreceivesmoneytovaryorwaiveatermofthelease.
• Timeofevent:whenleasetermiswaivedorvaried
• Gain:capitalproceeds>costofvarying/waiving
• Loss:capitalproceeds<costofvarying/waiving
• Exemption:leasegranted<20/9/1985
Lessoragreestovaryatermofthelease.Inreturn,thelesseepaid$1,000tothelessor.Thelessorincurred$100inincidentalcoststovarytheagreement(lesseepaytolessor)(payforpetsallowed)
CGTEventG1(s.104-135)
• What:capitalreturnsbycompanies(notsharebuybacks)(shareshold,holdshares,capitalpayments,notdividend)
• Timeofevent:whenpaymentismade• Gain:capitalproceeds>costbaseof
shares.Paymentswillreducecostbase(reducecostbaseto0)
• Loss:n/a(reducecostbaseà0;leftover—capitalgain)
• Exemption:shares<20/9/1985
APtyLtdagreestomakeacapitalreturnof$1/share.MrTisashareholder.ThecostbaseofMrT’ssharewas$1.50priortothecapitalreturn.(A$1paidtoT)(costbase=1.5,$1capitalreturn—costbase—50cents,gainifcapitalreturn>costofshares;ifreceive$2,CB=0,50àgain)(costbasereducedto50cents;ifreceive$2àmalegain)
CGTEventG3(s.104-145)
• What:liquidator/administratordeclaressharestobeworthless.
• Timeofevent:whendeclarationmade(writtenandissued)
• Gain:n/a• Loss:reducedcostbase• Exemption:Ifshares<20/9/1985
MichaelboughtOne.Telsharesfor$500.On15June2012,theadministratordeclaredthesharestobeworthless.
CGTEventH1(s.104-150)
• What:depositpaidtoyouisforfeitedbecauseprospectivesaledoesnotproceed.(notactual)
• Timeofevent:whendepositforfeited.• Gain:capitalproceeds>costinconnection
withprospectivesale• Loss:capitalproceeds<costinconnection
Monaentersintoacontractofsalefor$300kwherebyJuliepays10%deposit.Juliefailstocompleteandthedepositisforfeited.(depositwillbepartofactualsellofproperty)(depositactuallysell,sellasset
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withprospectivesale.• (notalwaysH1)
H1Xàeventnotoccuràpartofproceedsis10%receiveJulie,includeindeposit,notresidualcategoty)
CGTEventH2(s.104-155)Residual
• What:act,transactionoreventoccursinrelationtoCGTassetyouownanddoesnotinvolveanadjustmenttocostbase
• Exception:considerallotherCGTeventsfirst.Also,alltheotherexceptionstoD1apply.
• Timeofevent:whenpaymentismade• Gain:capitalproceeds>incidentalcosts
(notcostbase,eventinrelationtoland/factory)
• Loss:capitalproceeds<incidentalcosts
Stephanieownslandonwhichsheintendstoconstructafactory.AnotherbusinesspaysStephanie$50kasinducementtostartearly.Norightsorobligationsarecreated.
CGT Asset • s.108-5:anykindofproperty;or(definitionisverybroad• Alegalorequitablerightthatisnotproperty(forcurrency,early,everything)• Examples:Landandbuildings,sharesinacompany,goodwill…
Separateassets:Subdiv108-D Collectables:108-10 Personaluseassets:s.108-20• Buildingorstructure
constructedonpre-CGTland(certainclasses;buildonland;fixturebuildonland—land,butnotworkintax;depreciablebuildingitself&thingsinside,separateoutassets)
• Depreciatingassetthatispartofthebuilding(separatefrombuilding)
• Adjacentlandacquirednexttopre-CGTlandandsubsequentlyamalgamated.(2lands—pre/not—canstillkeeppre-land)
• ImprovementstoCGTassetwherecostofimprovement>improvementthresholdand>5%ofproceedswhenCGTassetsold
• Artwork,jewellery,anantique,orcoinormedallion;
• Rarefolioormanuscript;• Apostagestamp• Usedorkeptmainlyfor
your(oryourassociate’s)personaluseorenjoyment
• Capitallossfromcollectablecanonlybeoffsetagainstgainfromcollectable
• Notecollectable<or=$500isexempt:118-10
• Asetofcollectablesis1CGTasset:108-15
• (exhaustivelist;quarantine,collectablecapitalloss,offsetlossesagainstcollectableCGitself,notothercategoriesassets(shares…))(ifsetofcollectable,identicalasset,1asset,not6)
• Usedorkeptmainlyforpersonaluseorenjoyment
• Cannotmakeacapitallossfrompersonaluseassets:108-20(inhouse,notuselossforoffsetgain—sellissecondhand,mustlossvalueànotcapitalloss(upgradeassets))
• Capitalgainonpersonaluseassetignoredit1stelementcostbase<or=$10,000:118-10
• Asetofpersonaluseassetsis1CGTasset:108-25(unlessaset<threshold)
• (table)
Capital Proceeds Generalrule:s.116-20
• Moneyreceivedorentitledtoreceive• Marketvalueofanypropertyreceivedorentitledtoreceive• (receivedfrompurchaser,&costbase,reducedCB&CP)(include
instalment,evennotreceived)
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Modification1:MarketvalueSubstitutionrule.s.116-30
• Receivednocapitalproceedsàmarketvaluesubstituted• ReceiveCPs:(substitutetomarketvalue)
o someoftheproceedscannotbevalued;oro CP<>MV,anddidnotdealatarm’slength(preventarbitrage
betweentaxrates,givetorelative,withinfamily)(Value,giveninkind—stillsubjecttoMV)
Modification2:ApportionmentRules.116-40
• CPrelatestomorethan1CGTevent–apportionbetweenCGTevents
Modification3:Non-receiptrules.116-45
• CPreducedifnotgoingtoreceivesomeCP,notatfault,andtriedtogettheamountpaid.(R:entitletoreceiveinstalment—notreceive,canreduceCP)
Modification4:Repaidrules.116-50
• CPreducedbyamountyouhavetorepay(unlessyoucandeductthoseamounts)(reducetopriceactuallyreceived)
Modification5:Assumptionofliability.s.116-55
• CPincreasediftheotherentityacquirestheCGTassetsubjecttoaliability(ownmortgage,liabilitynotpasson,iftransfertoyouasnewowner,s.116-25onlyapplytocertainCGTevents)
Modification6:Misappropriaterule.s116-60
• CPreducedifemployeemisappropriatestheproceeds
Note:thesemodificationsonlyapplytosomeCGTevents:seetableins.116-25
Cost Base Element1:s.110-25(2)
• Moneypaidorrequiredtopay(forasset)• Marketvalueofpropertygivenorrequiredtogive(propertyvalue)
Element2:s.110-25(3)
• IncidentalcoststoacquireassetorrelatetotheCGTevent• Consultantfees Transfercost Stampduty
AdvertisingValuationcost SearchfeesConveyancingKits Borrowingexpenses(estfees) Certainconsolexpenditure(legalfees,establishmentfee)
Element3:s.110-25(4)
• Costofowningtheasset• Interestonborrowing(loan) Repaircosts ratesorlandtax
Notethesemaybedeductibleoutright.Iftheyare,theycannotbeincludedhere.(ongoingcostifassetisrent,rentalreadyordinaryincomefromproperty,repetition,notcapitalinnature,notdeductable;ifindeductable,nothere,ifpropertyproduceincome,usuallyongoing,deductable—notuseElement3)
Element4:s.110-25(5)
• Capitalexpenditureincurred:• Forpurposeorexpectedeffectofincreasingorpreservingassetvalue;or• RelatestomovingtheCGTasset(extensiontoahouse)
Element5:s.110-25(6)
• Capitalexpendituretoestablish,preserveordefendtitletoasset.(lawyerfees)
• Note:Certaincostsabovecannotbeincluded:110-37,110-38,110-40,110-45• Addup5elementsàCostBase• Ifholidayhouse—noincome—allcostsaredeductable—Element3
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Cost Base Modification Modification1:s.112-20Marketvaluesubstitution
• Marketvaluesubstitutedifnoexpenditureincurred• Someoralloftheexpenditurecannotbevalued;• Didnotdealatarm’slength
Modification2:s.112-25Split,changed/mergedasset
• Splits–apportioninareasonableway.Nomethodologyprovided• Mergedassets–costbaseaddedtogether• (Pushacrossevents)
Modification3:s.112-30Apportionment
• Expenditurerelatesto2ormorethings,apportiononareasonablebasis• CostbaseofCGTassetxProceedsfromsale/(proceedsfromsale+MV
ofremainingbit)• IfCGTeventhappensonlyto1partofCGTasset,butnottheother,
apportionmentbasedonmarketvalues.Modification4:s.112-35Assumptionofliability
• Increasecostbasebytheliabilityoftheotherentitythatyouassume.
Indexation • Toindexcostbase:(inflation)
costbaseelementxindexationfactorIndexationfactor=68.7(beingindexationat30/9/1999)(quarter)(given,notchange)(taxonincreaseinMV,partisinflation,ifincreaseCBininflatedamountànottaxoninflationamount;elementbyelementbasis)CPIfactorforquarterwhenexpenditureincurred(lookupindexforthequarter)
• Indexationonlyavailableforassetsacquiredbefore21/9/99(finalquarteravailable)• Indexationistoincreasecostbaseforinflation• Indexationisfrozenat30September1999.• Eachelementofthecostbaseisindexedfromthedateitisincurred(ifindexationischosen).• Indexationfactormustberoundedto3decimalplaces.• Donotindexiftheindexationfactoris1orless:s960-270(2)(sothatincreaseCBanddecrease
gain)• Noteexceptionforshareincompanyorunitinunittrust:960-275(3)• Noindexationofelement3orreducedcostbase(elements,ongoingcosts,incidentalcosts;
inflationnevercontributetoCL)• Note:CPIfiguresintextbookhavechanged• (instead—discount;newdiscountfigure50%)
Reduced Cost Base Elements:s.110-55
• Sameascostbaseexceptcannotindexanyelementsandelement3isreplaced.(neverindexed)(elementtoelementbase—addup0
• Element3replacedwith:(NOelement3)• Balancingadjustmentswhichresultinassessableincome(writingback
depreciation)Modifications:Division112
• ModificationsforCostbaseappliestoreducedcostbase• Alsothesamesections
Relevance? • Onlyrelevantindeterminingcapitalloss(CalculateCL,notuseCB,useRCB)
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Exemptions Cars:s.118-5 • DisregardanyCGorCLforcars,motorcycleorsimilarvehicleCollectables&personaluseassets:s.118-10
• Collectableswithfirstelementofcostbase<$500disregarded(CBnotCGamount)
• Personaluseassetswithcostbase<$10,000disregarded.Notelossesdisregarded(gain)
Otherwiseassessable:s.118-20
• IfthegainisotherwiseassessableoutsideofCGT,gaindisregarded• (anti-overlap,OIorSI,captureelsewhere)
Depreciatingassets:s.118-24
• Gainondepreciatingassetdisregarded.SubjecttobalancingadjustmentinDiv40(depreciateasset,butnotwholeforproduce—partprivatepurpose—CGT;parttaxablepurpose—depreciationregime)
• NotehoweverEventK7Tradingstocks:s.118-25
• Tradingstocksubjecttotradingstockprovisions(seekweek9)
Damagesforinjury:s.118-37
• Compensationforpersonalinjuryandgamblingwinningsdisregarded
Main Residence Exemption • ACGorCLisdisregardediftheCGTassetwasyourdwellinganditwasyourmainresidence
throughouttheownershipperiod:s.118-110(onlyhave1mostregularlyused,neednominateif>1)(118-B)(define,normalhouseunit,encouragehomeownership)
• Ownershipperiodstartswhenownershipinterestacquired:s.118-125
Dwelling–adjacentland:s.118-120
Assoonaspracticablerule:s.118-135
Absence–6yearrule
• MainresidenceextendstoadjacentlandifsameCGTeventhappenstoit(atthesametime:s.118-165).(*also,buthavetosellatonce(sametime))(adjacent,asapart)
• Mustbeusedprimarilyforprivateordomesticpurpose.
• Maximumareais2hectares
• Designedforfarmers.(sellasonesinglefarm,applyforonlyhavehousenotfarm;rulesextendandlimitexemption)
• Deemedmainresidence(buypropertysubjecttoattendance—moveout.Imoveinassoonaspractical—canclaimmainresidence)
• Nootherdwellinghasbeentreatedasmainresidence
• Ifnotrentedàcancontinuetotreatdwellingasmainresidenceindefinitely
• Ifrented,canonlytreatdwellingasmainresidenceforamaximumof6years.
• (only1mainresidence,continuetoclaimevenifnot,(movetosomewhereout)movetorentalroom;unlessrentoutfor6years,ifnotrentout—forever;canmoveintoandoutforlongertime)
Changingmainresidence(6mthrule):s.118-140• Cantreatbothdwellingas
mainresidenceforaperiodof6months.
• Mustnotberentingoldhouseout
• Oldhousemustbemainresidenceforatleast3mthsinthelast12mths(onlysituationtohave2mainresidency,whenbuilding,overlap,oldoneisresidence,notrentoutold)
Mandatoryexemption:notchoice;bad:ifsellhomeatloss—notuse—mandatoryregardlesswantornot
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Main Residence Exemption—limitations Spouse:s.118-170 Partialnon-mainresidence:s.
118-185Rentedpartofdwelling:s.118-190
• Husbandandwifecannominatedifferentdwellingsasmainresidence.
• Ifdifferentdwellingsnominated,thefollowingrulesapply:
• Ifyourownershipinterest<50%,wholeperiodcanbetreatedasmainresidence.Notestillhavetocomplywithpreviousrules
• Ifownershipinterest>50%,onlyhalftheperiodcanbemainresidence
• Notespouseincludesdefacto:
• Taxaspouse—canonenominateeach—butmaylosssomeconcession,may1—fullconcession;neednominate,husbandanother
• Wheredwellingnotusedasmainresidenceforentireownershipperiod.However,noteextensionsdiscussedpreviously.
• CG/CL=• CGorCLxnon-main
residencedays/daysinownershipperiod.
ProportiondailybasisGain=dayclaimforexemption/dayinownershipperiod
• isusedtoproduceassessableincome,themainresidenceexemptionwillnotapplytothatpart:
• Example:if¼ofthehouseisrentedout,althoughthehouseisstillyourmainresidence,theexemptionwillnotapplyto¼oftheCGmade.(3/4CG)(proportion.Onfloorareabasis—restofroom)
e.g.spousehusbandwideownhomeandH50%wife50%;wifecanclaimforMRà$1millionà500k—fullexemptHolidayhouseH70%W30%(H>50%)Whensell70%canclaimexemptbut5year;wifepay30%becausenoMR)
CGT & Death Mainresidenceofdeceasedandnotusedtoproduceassessableincomeatdateofdeath
OtherCGTassets
• NoCGTconsequencesforthedeceased:s.128-10(notCGTevent)
• Beneficiaryinheritsasset.Costbase=MVonthedateofdeceased’sdeath:s.128-15(justforMR)
• Ifbeneficiarysoldwithin2yearsofdeceaseddying,gainorlossdisregarded:s.118-195
• Noteifdeceasedusedtoproduceassessableincomebutacquiredbefore20/9/1985,2-yearrulestillapplies:s.118-195(Notmatterifpassed2yr—partialexemption)
• Partialexemptionwillapplyotherwiseasdeterminedabove.
• (justassumenothappen,onlyoncebeneficiarysell)
• NoCGTconsequencesfordeceased:s.128-10
• Beneficiaryinheritsasset.• Deceasedacquiredtheasset<20/9/1985,
o Costbase=MVondateofdeceased’sdeath
o Dateofacquisition(forCGTdiscount=dateofdeath)(discountpurpose50%)
• Deceasedacquiredtheasset>19/9/1985,o costbase=costbaseofdeceased.o Dateofacquisition=whendeceased
acquiredito (confinedtopre-CGT)
(owetotransferredbytrustee,admintwillownedbypassedaway)
Rollovers • Effectistodeferthetaxingpoint(paytaxlater)
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• 2types:o ReplacementassetDiv124&Subdiv112-C(replacingasset/owners—disposalofold)o SameassetrolloversDiv126&Subdiv112-D(changingowners,oneasset,marriage
breakdown—negotiatesettlement;A1fordisposal—rollover)• Generally,thenewassetornewownerpicksupthecostbaseofthereplacedassetorreplaced
owner
Scripforscrip124-M
• Post-CGTsharesortrustinterestsarereplacedwithothersharesortrustinterestse.g.companytakeover
• Conditions:o singlearrangemento takeovercompanymustown80%oforiginalcompany(one
arrangement,getnewshares,disposalofold,butjustpickupCB)o allmembersmustbeallowedtoparticipateonthesameterms
• Rollover:o Capitalgainisdisregarded(doesn’tapplyforcapitallosses)o Costbaseoforiginalshareapportionedovernewshareo Norollovertotheextentofcashreceived(CASH—paytax)
Marriagebreakdown126-M
• CGTassettransferredtospouseaspartofmarriagebreakdownsettlemente.g.divorce
• Conditionso MustbewrittensettlementagreementapprovedbytheFamilyCourto OnlyrelevantCGTevents:A1,B1(Disposals),D1,D2,D3,F1(Creations)o Norolloverfortradingstock
• Rollover:o Post-CGTasset:transfereepicksuptransferor’scostbaseattransfertimeo Pre-CGTasset:remainsapre-CGTassetfortransfereeo Forcreations:transferee’scostbaseistheincidentalcostsincurredo (noassetstotransfer,it’srightstotransfer)
Step 2—Apply net capital losses from prior years Net capital loss • S.102-10(1):(operationsection)
o Seemethodstatemento Netcapitallossis:
§ Totalcapitallosses§ Lesstotalcapitalgains(calculativeTCL-TCG=netlossàcarryforward)
• S.102-10(2):o Youcannotdeductfromyourassessableincomeanetcapitallossforanyincomeyear
(CGàCL)• S.102-15(1):
o Incalculatingyournetcapitalgain,netcapitallossesareappliedintheorderinwhichyoumadethem.
• S.102-15(3): o Ifcan’tapplyanetcapitalloss,itiscarriedforward(indefinite)
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Step 3—Reduce by the discount percentage Discount capital gains • Div115(CGTdiscount50%,regimeconcessiontoreplaceinflationindex)• Acapitalgainisreducedbythe‘discountpercentage’if:(NCG:discountCG50%orNON-
discountCGnot50%)o acapitalgainremainsafterapplyingcapitallossesandprioryearnetcapitallosses;ando thecapitalremainingisa‘discountcapitalgain’(step1&2offsetlosses
alreadyàCGàdiscount)• nodiscountfornon-residentsandtemporaryresidentswithrespecttocapitalgains“accrued”
after8May2012:s.115-105
Correctentitys.115-10
• Individual-50%• Trust–50%(trustee(legalowner))• Complyingsuperfund–33⅓%• Mustnotbenon-residentortemporaryresident:s.115-105• (companynotdiscount,nostep3)
Timings.115-15
• CGTeventthathappenedafter11.45am21/9/99(discountintroduced)
Noindexations.115-20
• Calculatedwithoutindexation(CB,ifcalculated,recalculatewithoutindex)
• notespecialruleforCGTeventK7(depreciableasset)12monthsownerships.115-25
• CGTassetmusthavebeenacquiredatleast12monthsbeforetheCGTevent(12months+1day)
• Seeanti-avoidanceruleins.115-40(A1)CorrectCGTevents.115-25(3)
• CGTeventmustnotbeexcluded(seelist)• (D1notdiscountableevents,listnotdiscounted)• (Applylosstonon-discountablegain:Step2:600+400loss200—offset
200against400—fullbenefit;step3:NCG=1000[600A1+400D1]600*50%=300+400à700NCG—step4
Step 4—Apply the small business concessions Small business concessions: Div 152 15yearretirementexemption:Subdiv152-B(best)
• Capitalgaindisregardediffollowingconditionsmet:• Basicconditionsmet;• Ownedfor15years;• Over55yearsandCGTeventhappensinconnectionwithretirement(or
permanentlyincapacitated);• Ifitisashare,thenthecompanymusthaveasignificantindividual(20%
interest).(nothavesuperannuation—sellforretirefunds,pension;wipeoutallCG,complexitytaxfree,runabusiness,sellsharesofcompany,notlisted,runasfamily/owncompany)
50%activeassetreduction:Subdiv152-C
• Capitalgainiseligibletobereducedby50• Onlyneedtosatisfythebasicconditions.• (inaddtoCGT50%discount,applyforcompany,whichnotapplyforCGT
discount)Retirementexemption:Subdiv152-D
• Lifetimelimitof$500,000CGcanbedisregardediffollowingconditionsmet:
• Basicconditionsmet;
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• Taxpayer>55yrsold.• If<55yrsold,mustpayintocomplyingsuperfund.
Replacementassetroll-over:Subdiv152-E
• CanchoosetodisregardCGifbasicconditionsaremet;• Mustalsoacquirereplacementactiveasset1yearbeforetheCGTevent
orwithin2yearsaftertheevent.(sellfactory,upgradeoldtobuynewfactory—rolloverdeferral)
Basic Conditions: s. 152-10 CGTEvent • TheCGTeventmustresultinacapitalgainIfCGTassetisaShare/unitintrust
• ThetaxpayerisaCGTconcessionstakeholder(i.e.personwith20%interestorspouseofperson);or
• CGTconcessionsstakeholdershaveasmallbusinessparticipationpercentageofatleast90%inyou(thetrustee)
• (H&Fequalbeneficiaryàtrustàcompanyàcarryonbusiness,goupchain100%*50%ofH,Hhas100%intrusteeàSI,alsoCGTS/H)
EntityisSBE: • Aggregatedturnover<$2minpreviousorcurrentyear:s.328-110(smallbusinessentity)
MaximumnetassetValueTest:s152-15;
• Netassetvalueoftaxpayerandrelatedentities<or=$6m:s.152-20• Disregardmainresidenceandassetsthatarepersonaluse:s152-20• (ifnotsmallbusinessentity)
ActiveAssettest:s152-35
• Assetmustbemustbeactiveforlowerof50%ofthetimeor7.5years(15years)
• Assetsareactiveifusedorheldreadyforuseinyourbusiness:s.152-40(andtrust)
• Ifassetisashare,thenif80%ofthecompany’sassetisactive,theshareisactive:s.152-40(testcompany)
Small Business Concessions • CGTconcessionstakeholderofacompanyortrust:s.152-60
o Significantindividualo Spouseofsignificantindividualwithasmallbusinessparticipationpercentage>0%
• Significantindividual:s.152-55o IndividualwithSmallbusinessparticipationpercentageofatleast20%
• Smallbusinessparticipationpercentage:s.152-65o Company:percentageofvotingpower,dividendsorcapitaldistributions(interestof
companyandtrust)o Trust:percentageofdistributionso Directandindirectinterestsincluded(100%*50%-indirect,multiplecompany)
• Smallbusinessentitys328-110o Carryonbusiness;and(not<=,just<lessthan,lessthan,ratherthanequal)o Aggregatedturnoverlastyearwas<$2m;oro Aggregatedturnoverthisyearislikelytobe<$2mand2previousyearswasnot>$2m;or
(projectedatstartofincomeyear)o Aggregatedturnoverthisyearis<$2m(measuredatendofincomeyear)o (3tests,satisfyone,betterto3rdàbecausecanuseGSTcontinuousthroughoutyear)
Special rules: CGT and foreign residents • Non-residentsonlysubjecttoCGTiftheCGTassetistaxableAustralianproperty.(exam—
residency)
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• TaxableAustralianproperty:o Realproperty;(land)o AssetsusedinabusinessinAustralia;o Sharesinlandrichcompanyprovidedyouholdatleast10%interest(everythingelseisnon
tax)• CGTeventI1dealswithchangeinresidency.(statute(stoptoberesident)—happenfornon
taxableasset—stoptaxing)• I1–deemeddisposalofCGTassetsthatarenotTAP
o CanelectnottohaveI1tohappen.However,allnon-TAPassetsdeemedtobeTAP.(willbetaxedinthefuture)
• IfindividualorcompanybecomesanAustralianresidents.855-45:(deemtoapplynontaxassets)o CB/RCBistheasset’smarketvalueattheresidencechangetimeo timeofacquisitionisresidencechangetimeo thisdoesnotapplytotaxableAustralianpropertyorpre-CGTassets
• Thereareequivalentrulesforatrust.
Case Study • Joe(Australianresident)purchasedahouseon1July1997for$100,000(notpre-CGT)• Joeincurredlegalfeesof$1,000andstampdutyof$9,000onpurchase• Joeentersintoacontracton1July2007tosellthehousetoYfor$200,000• Settlementoccurson1October2007• Joeincurslegalfeesof$1,000onsale(incidental—isnotpartofCB)• ThehousewasnotJoe’smainresidence• Joehasnocapitallossesorprioryearnetcapitallosses(inprogress)• IsJoeliableforCGTonthesale?
• CGTeventA1:disposalofCGTassets.104-10(1stCGTevent)
o CGTeventA1happensifyou*disposeofa*CGTasseto s104-10(2):disposalrequiresachangeofownership
• CGTassets108-5o Thelandis‘anykindofproperty’
• Timings104-10(3)o Entryintodisposalcontracton1July2007o Therefore,capitalgainincludedinincomeyearended30June2008
• Capitalgain/loss?s104-10(4)o Capitalgain=CapitalProceeds–CostBaseo Capitalloss=ReducedCostBase–CapitalProceeds
Case Study: CB / RCB • Element1:Xpaid$100,000toacquirethehouse• Element2:Incidentalcostsof$1,000legalfeesand$9,000stampdutyonpurchase,$1,000
legalfeesonsale(notreducecapitalproceeds)(1000—apartofcostbase,notasreducecapitalproceeds)
• Elements3-5:n/a• CB/RCB(withoutindexation)=$111,000• IndexationofCB:
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o Yes,acquiredbefore30/9/1999&heldfor12months((1)allowed(2)how)o Indexationfactor=68.7/66.6=1.032(incomequarterofacquisitiondateonpurchase)o Element1:$100kx1.032=$103,200o Element2:($10kx1.032)+$1,000=$10,320+$1,000(1000incurredonsale,not1999)o IndexedCB=$114,520
• Noexclusionsormodificationsapply
Case Study: Net capital gain • CapitalProceeds=$200,000• Capitalgain:
o Noindexation:$200k-$111k=$89k(notdiscountyet)o Indexation:$200k-$114,520=$85,480
• Noexemptionapplies• Discountcapitalgain
o Individual;CGTeventhappenedafter21/9/99;Noindexation;heldfor12months;CGTeventnotexcluded
o capitalgainreducedby$44,500($89kx50%)(AIdiscountable)• Nosmallbusinessconcessionapplies• Netcapitalgain=$44,500
W7—General Deduction Part 1 1. Nexus2. PrivateExpenses
Revision and Feedback Taxable income = AI – Deduction—general deduction (ordinary operating expense to operatebusiness);specificdeductionàxrate
o If a taxpayer’s factory—which is covered by insurance—is destroyed by fire, CGT event C1occurs.Thetimeoftheeventiscompensationpaid/whenlosshappen.
o CGTeventC2occurswhenanintangibleCGTassetexpires.o RestrictivecovenantpaymentstriggerCGTeventD1.o Whena share trader sells some shares for a gain,CGTeventA1 occurs.However, the capital
gainismostlikelyreducedtozeropursuanttosections.6-5ITAA1997.(CGTnotapply,180-20,anti-overlap rule in ACT, not under CGT, trading shares revenue gainàordinaryoperationàrevenueaccountàordinaryincome)
o ThemostimportantCGTexemptionisforpre-CGTassets.o If an asset falls into the definitions of both personal use asset and collectible, it is taxed as a
collectible.o Garyboughtaboat for$20,000twoyearsagoforweekendfishing.Hesold it for$12,000this
incomeyear.Hiscapitallossisdisregarded.(personaluseasset)o CapitallossoncollectiblesareonlyallowedtooffsetCGforcollectible.o Capitalgainsandlossesonanitemofcollectiblearedisregardedifthefirstelementof itscost
baseisnotmorethan$500.o Asmallbusinessentity’sturnoverthresholdis$2million.(aslongasreached,nolonger)o The four SBE CGT concessions are (1) 15 years, (2) retirement, (3) 50% active asset, and (4)
rollover.o Non-residentsaresubjecttoCGToncertainCGTassetsknownastaxableAustralianproperty,
being basically (1) real property in Australia and (2) business assets in Australia (exemptdisregarded)(sharesandlandrich)(bigminingcompany,shares10%,50%inAustralia???)
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Nexus: income and earning &plantoearn&expenditureàonlydeduction for income producingactivity
“too soon”—feasible study. Tooearly, not carry on business (ormayunderCGTcostbase)
Multiple motives—privatebusiness, a proportion to extendfor private purposeàpartdeduction
Private expense—not deductable(holiday,exceptions,childcare)
Generaldeduction=ordinaryincome,broadtopic
Capitalexpenseàcapitaloutlay large,bigbusiness,depreciateovertime,not8-1deduction,that iscapitaldeduction/expenditure
s. 8-1 ITAA 1997 Youcandeduct…any(1)lossoroutgoingto(2)theextentthat:(2:proportion)
(a) Itis(3)incurredin(4)gainingorproducingyourassessableincome;or(3:nothypothetical,notfullysubjective)
(b) It is (5) necessarily incurred in carrying on a *business for the purpose of gaining orproducing your assessable income… (5: not = it is necessary incidental to business,appropriateinthatcircumstancetoincurthatexpense)(Method:positivelimb1atleast,andfailall4negativelimb)
However,youcannotdeductalossoroutgoingunderthissectiontotheextentthat:
(a) Itis…ofacapitalnature;or(b) Itis…ofaprivateordomesticnature;or(c) It is incurred in relation to gaining or producing your *exempt income or your *non-
assessablenon-exemptincome;or(d) AprovisionofthisActpreventsyoufromdeductingit.(Div.26)
Nexus: Total Holding Fact:(needsufficientnexus)
o InvestmentCompanyreceivedinterestbearingloansfromparentcompanyo On-lenttoitssubsidiary,someofwhichwereinterestfreeo Issue:interestexpensesattributabletointerest-freeloandeductible?
Held:deductible
Reasons:
GeneralDeducpon:s.8-1ITAA
1997
Nexus
Specificexamples
"toosoon"&"toolate"
Mulpplemopves
PrivateExpenses Food
Travel
ClothingCapitalExpenses
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o “Ifataxpayer incursarecurrent liabilityof interest forthepurposeof furtheringhispresentorprospective income-producing activities…generally the payment…will be an allowablededuction”
o Loansare“designedtorender[thesubsidiary]profitableassoonascommerciallyfeasible”andthusgenerateA.I.forthetaxpayer.
Tax payments Incometaxpayments:deductibleunders.8-1ITAA1997?—notdeductible
o Arguably“necessarilyincurredincarryingonabusiness”.(lossoroutgoing?)o Butnotfor“producingA.I.”(elementstest)(bypayingtax,taxisnotrequiredtopaytogenerate
income—lackofnexus)
Cf.
o GST:specificallydisallowed:Division27ITAA1997o Stampduty,landtaxes,etc.:deductibleunders.8-1(theyarenottaxunderthisACT)
Theft loss—Theft loss of business proceeds? Deductible:CharlesMoore
Reason:“Bankingthetakingsisanecessarypartoftheoperationsthataredirectedtothegainingorproducingdaybyday…assessableincome”.(notincurredingeneratingincome;broadly“in”thecourse of producing assessable incomeàbanking and taking is ordinary activityàpart of makingincome)
Specificdeduction:theftlossbyemployee:s.25-45ITAA1997(specific)
Expenses on Wrongdoing
Penalties and fines? o “Penaltyisimposedasapunishmentoftheoffenderconsideredasaresponsiblepersonowing
obediencetothelaw.Itsnatureseversitfromtheexpensesoftrading”:Herald&WeeklyTimeso Ingeneral,penaltiespayableunderanAustralianlaworaforeignlaw:notdeductible:s.26-5(1)
ITAA1997(speedingfines,lossàfineitselfincurred,obligedtopay,incarryinginbusinessànotofbusinessactivity,notinvolvespeeding,areyoudoinganythingtofurtherbusiness,greyarea,truckdriver;racingfromclienttoclient,deformationcolligation;punishaboutpunishingwrongdoer,notassessableincome)
o Cf.legalexpensesredefendingagainstcharges:canbedeductibleprovidedsufficientnexus:• Expensestoprotectcompany’sabilitytocarryonbusinessàsufficientnexus:MagnaAlloys
(deductibleàpaymenttolawyer)(denyforpenalty)• Legal expense in defending disciplinary charges brought against an individual by his
employer:Day[2008]HCA53.
Theft loss of illegal proceeds? o Deductible,providedsufficientnexustotheillegalactivitieswhichproduceA.I.:LaRosa(Drug
carryonbusiness(Moorecase)taxlawnottopunishwrongdoingbuts.26-54)o Now:not deductible if incurred for offences punishable by imprisonment >= 1 year: s. 26-54
ITAA1997• Commissionercanamendassessmentwithin4yearsofconvictionoftheoffence(standard
amendmenttime,preventfrompayingtax4yearsago)o Alsoexcludedfromcostbaseandreducedcostbase:s.110-38&110-55(9A)ITAA1997.(notin
CB,notdeductible)
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Nexus—too soon
Maddalena (1971) Fact: professional footballer incurred travel and legal expenses in negotiation for transfer ofemploymenttoanotherclub.
Held:notdeductible
Reasons:
“Theexpenditurewouldhavebeenincurredingetting,notindoing,workasanemployee.Itwouldcomeatapointtoosoontobeproperlyregardedasincurredingainingassessableincome”.(togetajob, not in doing a job, not producing any AI yet) (not have to get income WalkerscaseàdeductibleàintentionaltoproduceAIàifnotactually,notmoney,notmatter)
Cf.agencyfeesofprofessionalfootballertonegotiatecontracts:deductible:SpriggsvFCT;RiddellvFCT[2009]HCA22.(Commonpractice,ordinaryindustrypractice)
Spriggs v FCT; Riddel l v FCT [2009] HCA 22 o Employmentvsprofessionalsportsperson/businesso Inbusiness?(allotheractivitiesàbusiness;inemploymentorownbusiness?)(Stones)
• Aquestionoffact• HighCourt:yes
§ Notsimplyanemployeeofhisclub§ Exploitedtheirsportingprowessandassociatedcelebritywithdifferentclubsoverthe
years§ Synergybetweenplayingactivities andnon-playingactivities:both income-producing
activities(businessslopeandactivity,size/slope/time/frequent)o Capitalexpenditure?
• No:contractswererevenueassetsofshorttermnature.(expenditureàdeductible)
Steele Fact:
o Taxpayeracquiredaproperty,intendingtobuildandoperateamotelonito Inthemeantime,derivedsmallincomefrompropertyo Duetodisputewithherbusinesspartner,soldherinterestinpropertyo Claimedinterestexpensesforpast6yearsonloansusedtopurchaseproperty
Held:deductible(deductibleeventhoughnotmakemoney)
Reasons:
o “Temporalrelationshipbetweentheincurringofanoutgoingandtheactualorprojectedreceiptofincome…isnotlegallyessential,andwhetherit isfactuallyimportantmaydependuponthecircumstancesoftheparticularcase”(point:committeetheprojectexpenseàdeductible)
o Now:may subject tonon-commercial loss rules:Div 35 ITAA1997. (stop claimdeduction forhobbies,notproduceanyAI)
Nexus—too late
Temporal Nexus o Not necessary for expenses to be incurred “in a year when the company is actively on that
business”:AGC(Advance)• PrinciplefollowedinPlacerPacificManagement
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§ Established“longtailliabilities”principle(notmatchingprinciple,claimwhenincurred,deductibletotheyearsubjecttothat, incurred) (solelyconnectedwithbusiness,butceasedàbutstilldeductible)
• Sameprincipleappliedtointerestexpensesonloansacquiredduringactivebusinessperiod,eveniftheinterestwereincurredafterthebusinessceased:Brown,Jones(changeplantothebusinessactivity,connected)
Multiple motives
“To the Extent”—Fletcher Fact:
o Taxpayerenteredintotaxminimisationschemeo Purchasedanannuityfromrelatedcompany,financedbyloanfromGroupCompany.o Wouldresultinlargelossesinfirstfewyears.o Optionfortaxpayertocollapsearrangement.
Held:deductionlimitedtotheamountofA.I.fromannuity.(uptoincomeretained)
Reasons:
o “Motiveofthetaxpayerinmakingtheouting…apossiblerelevantfactortoconsider”o IfA.I.>expenses,primafaciedeductible(motivenotmatter)o IfA.I.<expenses,requiresinquiryintothemotiveoftaxpayer
• Apportion if havemotive other thanproducing A.I. (use proportion, URE case: borrowloan frombankat interest rateof12.5%,andmake loans tohiswife,andwifepays2%interest—purpose basisàpurpose of spending 12.5%à benefit wifeà2% deductible;10.5%notdeductibleàprivateexpense)
Payments to Related Entit ies o DeductionlimitedtoamountsdeemedreasonablebytheCommissioner:s.26-35ITAA1997
• Symmetric treatment for recipient: s. 26-35 (4) ITAA 1997 (Limited to normal marketvalue)(somebodyelse,levelofexpertise)
o Relatedentities:• Include“relatives”asdefinedins.995-1ITAA1997(husbandandwife,overpayrelativeà
biggerdeductionàlesstax)
Expenses for Capital Gains If expenses would otherwise be deductible solely due to “an amount…included in the assessableincome…[as]netcapitalgain”:notdeductible:s.51AAAITAA1936.(Denyingdeductionwhenonlyincome)(Not8-1ànotAIforincomeordinaryincome)(Property,realestate)
What if revenue expenses are incurred for both O.I. and capital gain (e.g. interest expenses oninvestmentproperties)?(proportionoutà2motivations)(buyassetsolelyfornegativecapitalgains(NCG),notpartofordinarybusinessànot8-1àforincurringAI)(Significantwageàbuyproperty)
Negative Gearing s.51AAA:applicable?
o Possible,butneedtoapportiontheexpenses tocurrentrental incomeandfutureanticipatedcapitalgainàhow?(change/marketvalue)
o ATOpractice:
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• Due to absence of a specific apportionment formula, interest expenses fully deductible(deductibleevenforCG)(Deduction off other gain pay taxßnegative gearing deduction/expense on property,depreciationandinterestdeductionàincomerentgetfrom)
• Verypreferentialtreatment§ Timing:currentdeductionvscapitalgaininfuture(CGàfutureàdifficult,notknowCG
component,notonmarketvalueincrease)§ Amount:fulldeductionvsCGTdiscount§ Cf. “passive activity losses” rule in the US (guarantee negative gearing losses, not
negativegearingoffset)
Individuals:NetRentalIncome
Number(‘000) % $(billion)NetProfits 528 31% 4.1Netloss 1198 69% (12.7)Total 1726 (8.6)Rentalàfornegativegearing
Private Expenses Food o Incurred“for”vsincurred“in”(notfor)o Nexustooremote:e.g.Cooper(footballer,eatalottobestrong,whatisthecourse/activityfor
producing A.I.à not paid for bear, paid for play) (not sufficient nexus) (private, different:providefoodtosomebodyelse)• Hasto“eat”evenifnotproducingA.I.
Travelling Expenses o Travel during leave to improve professional knowledge and skill: deductible:Finn (deductible,
conferencearchitecture,representfirmàrelatedtowork)o Travelbetweenhomeandalternativeworkplace (e.g. clientoffice):deductible:Ballesty (grey
(private in nature)àrugby player training place gymàget deductionànothing privatelyexcessivenatureàhomeasbasefordifferentplacesàuniquecase***facts)
o Travelbetweenworkplaces:specificdeduction:s.25-100ITAA1997o Travelexpensesbetweenhomeandworkplace(e.g.employer’soffice)
• In general, private expenses: Lunney; Payne (2 places, unrelated jobsànot deductible)(Homeàwork:notundertakingworkwhentravelànotearnsalaryàprivateexpense)
(Travel fromwork 1 to 2àget deductionànot private, deduction even though 8-1àif home office not use 25ànot live in either of them) (e.g. client 1 and client2àissamejob,notdifferentjob,25onlydifferentjob,primeràdeductiblebecauseheisworkingàproducingA.I.fortraveling)
• Exceptions
Travel Between home and work Exceptionstogeneralrule:
o Carrybulkytoolsorequipmentforworkandcouldnotleaveatwork• e.g.extensionladderorcello:Vogt(transportàgetdeduction)
o Home:abaseofemployment(couldbededuction,latterpoints)• Startworkathomeandtraveltoaworkplacetocontinuethework
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§ e.g.ITstaff:Collingso Shiftingplacesofemployment
• Regularlyworkedatmorethanonesiteeachdaybeforereturninghome(primerdeduction)§ e.g.travellingsalespeople,teacherteachingat4schoolsperday:Wiener
Education Expenses Sufficientnexus?(notalways)
o Education expenses incurred to enable taxpayer to be transferred to a higher salary scale:deductible:Hatchett (direct increase pay scale, automatically for HSC, also arts degreeànotdeductibleànotsufficientnexusàgeneralskill,notteachingskill)
o Subjecttos.82AITAA1936o Self-educationexpense:first$250notdeductibleo ATOposition:
• “arelevantconnectiontotaxpayer’sincome-earningactivities”àdeductible:TR98/9
Home Office o Runningexpenses:
• e.g.electricityandcleaningexpensesattributabletothehomeoffice§ Deductible:Handley
o Occupancyexpenses:• e.g.mortgageinterest,ratesandinsurances(proportionaldeduction)(occupancyexpenses)
§ Ifgenuine“placeofbusiness”:deductible:TR93/30(twotypes:realandnotreal)§ http://law.ato.gov.au/atolaw/DownloadNoticePDF.htm?DocId=TXR%2FTR9330%2FNA
T%2FATO%2F00001&filename=pdf/pbr/tr1993-030c1.pdf&PiT=99991231235958• Issue:CGTexemptionforhome
• Otherwise:notdeductible:Handley• (authoràno other place, barrister: purpose for study is for convenience, not
deductibleàbut not mortgage, operating expense cleaning/light/printing expensedeductible)
Entertainment o Circulardefinition:s.32-10ITAA1997
• Entertainment means: (a) entertainment by ways of food, drink or *recreation; or (b)accommodation or travel to do with providing entertainment by way of food, drink or*recreation.(food,drinkandpartyàdeductible)
o SpecificprovisionsinDivision32:• Ingeneral,notdeductibleunlessoneoftheexceptions:s.32-5• Exceptions:e.g.(toemployeetocertainsituation)
§ Fringebenefit:s.32-20 (aredeductibleunder8-1 table;8-1deductible?YesàDiv32denydeskàexceptiontodenyàgetdeduction)
§ Certainpromotionandadvertisingexpenses:s.32-45§ Etc.
Medical Expenses o Ingeneral,personalexpenses,unlessattributabletoemployment/business(notdeductible)o Specifictaxoffset:“medicalexpensetaxoffset”(taxoffsetisnotdeductionrighttoendaftertax
rate)
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Clothing Nexustoassessincome
Boots for gardenersàprotective closing, havetowearsunglasses
o Generalrulesapply:(notdeductible)• e.g.wintercoatforworkersinfreezerroom:deductible(protectiveclosing,harshcondition)
(deductionforthosedressoverandabovenormalpersonneed)o Examples:
• Edward:extraclothes forpersonal secretaryofGovernor’swife (outfit,notwear same inthesameday,conditionofemployments)
• Mansfield: extra-large shoes&moisturiser for flight attendant (Qantas, becauseofwork,needtobuycompressionstockingàoverandabovenormalpersonneedàsolelyforharshcondition)
• Morris:sunscreenlotion&sunglassesfortennisumpire• FuneraldirectorintropicalQueensland:
§ Blacksuit?(sufficientlyconnected?Notspecificenough;notconnectwithemployeràprivatised) (suits not deductible, not registered, connection not sufficient withemployer)
§ Blacktrousers?o Specificrulesfor“non-compulsoryuniform”:
• Ingeneralapplyforemployees:s.34-5(Normalnotdeductible,unlessdesign/protective).• Not deductible unless either occupation specific clothing, protective clothing or properly
registered:s.34-10.• TR97/12&TR2003/16:• http://law.ato.gov.au/atolaw/DownloadNoticePDF.htm?DocId=TXR%2FTR9712%2FNAT%2F
ATO%2F00001&filename=pdf/pbr/tr1997-012c3.pdf&PiT=99991231235958; &http://law.ato.gov.au/pdf/pbr/tr2003-016.pdf(chiefàdeductibleàidentifyyouwiththeemployer,notwearout,judgers)
W8—General Deduction—Part 2 1. CapitalExpenses2. Casestudy:Citylink
(nexus,personalinnature,capitalbroadly,AI,NANEI)
Revision + Feedback o Therulesforgeneraldeductionsarestipulatedinsections.8-1ofITAA1997.
Uniform
Compulsory?
Registered?
Nexus Notdeductible
Deductible
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o AnexpenseiningeneraldeductibleunderthegeneraldeductionprovisionifitisincurredintheproductionofAI(assessableincome).
o Thefournegativelimbsinthegeneraldeductionprovisionsare(1)private;(2)capitalinnature;(3)NANEIorEIand(4)preventbyprovision
o Thewordstotheextentinthegeneraldeductionprovisiondictatesapportionmentofexpenses.o The issueof“anexpense incurredtoosoon” ingeneraldependsonwhetherthere issufficient
nexusbetweentheexpenseandtheproductionofAI.o Food expenses are in general not deductible because they are private in nature. (grey,
insufficientnexus)o Travelling expenses between home and office are in general not deductible, subject to 4
exceptions.(deductible)o Running expenses (such as electricity) of a home office are deductible while occupancy
expenses (such asmortgage interest) arenot deductibleunless the homeoffice is a genuinehomeoffice.
o Clothingexpensesareingeneralnotdeductiblebecausetheyareprivateinnature,unlesstheyhave the sufficientnexus with the production ofAI, or are uniforms that are compulsory orregistered/protective.
Deductions—General Concepts
Capitalexpenses
Ongoing,regularbasis
Noteitherofthem
Capital Expenses o IfhasnexuswithA.I.,whynotdeductible?(Capitalexpenses,businesspremises)
• Historical:“capitalgainsnottaxableàcapitalexpensesnotdeductible”o Blackholeexpenditures:(e.g.feasibilitystudy/research,notgoonproject,noasset,notincome
base)(intentiontoAI,butnotgoon,notfeasible)(taxing)• Mostlyresolvedbys.40-880ITAA1997(yes,deductible)(upfrontdeduction)(expensetoo
large,wrapoutallAI,notappropriatereflection,thebenefitgetsfromcapitalexpenses)
s. 40-880 ITAA 1997 Longoverdue:(s.8-1firstnotdeductiblebecausecapitalinnatureàs.40-880)
o Blackholeexpenses:Capitalexpenditureareingeneraldisallowed(becausecapitalinnature)o 1999:RalphReport:suggested“taxvaluemethod”o 2001:s.40-880(oldversion):onlyfor7specificitemso 2006:finallegislationo Businessrelatedcosts:s.40-880ITAA1997(thatcapitalinnature)
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• 5yearstraightlineamortisation(20%eachyear)• Conditions:
§ Capitalexpenditure(capitalinnature)§ “in relation to”existing, past or future business (proposing to carry on, atmoment
woundup)§ For“taxablepurpose”(relationtobusiness)§ Notrecognisedelsewhere***(e.g.incostbaseofCGTasset)(ifdohaveasset,capital
innature,CBànots.40-880àcomeafterCGT)§ Notspecificallydisallowed(old—deny)§ Notreturnofcapitalordebt(finance,loan)
• ATOposition:TR2011/6http://law.ato.gov.au/atolaw/DownloadNoticePDF.htm?DocId=TXR%2FTR20116%2FNAT%2FATO%2F00001&filename=pdf/pbr/tr2011-006c1.pdf&PiT=99991231235958
o Examplesof“business-relatedcosts”• Expendituretoestablish/changebusinessstructures(Partnersàtrustàcompany,legalfees,
protestation)• Expendituretoraisecapitalforabusiness(issueshares/instruments)• Expenditureoffeasibilitystudythatdoesnotleadtoanactualproject(otherproject:s.40-
830)
Capital vs Revenue Expenses o “Inmanycasesitisalmosttruetosaythataspinofthecoinwoulddecidethematteralmostas
satisfactorilyasanattempttofindreasons”:IRCvBritishSalmsonAeroEnginesLtd.(1938)2KB482 (distinction for deduction) (paying for time (amount pay reference to time)àrevenue innatureàno long lasting durable amount) (reasons: diverse, not consistentàidentify theprinciples)Tests:
o Onceandforalltest:(payonceforallàlumpsumàcapital innatureànotconclusive,registercompanyupfrontcostàforever,notinreferencetotime)• Butone lumpsumpaymentcouldberevenueexpenses:NationalAustralianBank(1997)
(paydefenceloans,employeecheaploans,loansubsidised,capitalorrevenueinnatureàmarketing expenditure, lump sumnot changenature, not changebusiness structure, stillrevenueinnature)
o Enduringbenefittest(longlastingbenefit,regardlessofhowlong,maycausetimeconsiderationsometimes)
o Structurevprocesstest• Leadingcase:SunNewspaper
Sun Newspaper Fact:
o Newspaper publisher purchased all rights of competitor’s newspaper, and right to use itspublishing equipment for 3 years (in instalment, preserve business structure, restrictivecovenant,monopoly)
o Competitoralsoagreenottopublishothernewspaperfor3yearso Wholepricewastiedtouseofequipmentandcovenanto Taxpayerthenceasedpublicationofthepaper
Held:CapitalExpense
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o Reasons:paymentwasfor“strengtheningandpreservingthebusinessorganisation…theprofit-yielding subject, and affecting the capital structure” (protect market share, not extending/expanding,justprotection)
CGT implications? (Leading test forwhat is capital,3part tests*** (1) characteristicofadvantagesoughtàsomethinglonglasting;(2)whatisthemanner(howtousethebenefitàongoingortime)(3)maindetainadvantageàlumpsumoralongtime))
o CGTasset?(no,createrightotherscannotpublishnewspaper)o Costbase?o Whenisitdeducted?o Capitalgain/loss?(onexpiry,but it isnotthewholeright)(economicpositionatmoment,true
reflectionofincome)o Timeofevent?(C2,3years)
Broken Hil l Theatres Fact:
o TaxpayeroperatedcinemasinBrokenHill(wanttorunmoviesinthetownhall,proposeAPP)o Incurredlegalexpensestoopposeopeningofcompetitor’scinema(monopoly,marketshare)o Taxpayerhadincurredsimilarexpensesseveraltimes,andmightincurthemagaininfuture.
Held:Capitalexpense
o Reasons:“incurred…forthepurposeofpreservingandprotectingthecompany’sbusiness”• I.e.“structure/process”test((1)characteristic(2)manner(3)enjoyed,incurredonceforall)
§ Eventhoughtheprotectionfromcompetitionmightonlylastfor1yearo CGTimplications?(ruleoutAPP,notprotectfromnow,newcompetitionwillcometomarket)o AnynewCGTassetacquired?(marketshare,notCGTasset,notincreaseinrealestatevalue)o Addtocostbaseofexistingcinemas?o Timingofrecognition?(ifC2àdeductatend,notoverlife,whenenjoybenefit)
• S.40-880ITAA1997(5yearamortisation,deductionofexpenses)o Cf.accountingtreatment?
BP Austral ia Fact:
o Lumpsumpaymentstoservicestationsforexclusivesaleofitsproductsforanumberofyears(typically5years) (industrychangeovertime,commonplacetoday,notcommonplacebefore)(becomecommonplace,exclusivesales)
Held:revenueexpenses
Reasons:
o “Thecase isnoteasytodecide.Butonabalanceofall therelevantconsiderations thescalesappeartoinclineinfavouroftheexpenditurebeingrevenuenotcapitaloutgoings”(nots.40-880then,revenueexpenditureàwholedeductionupfront,butpreferamortise)
o Judgesconcededthatthe“mostaptwayofdealingwiththesesums”mightbeamortisedoverthetermoftheagreement• Buttaxlawdidnotprovideforthistreatment.
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Regent Oil o SimilarfactasBPAustralia,except
• Agreementintheformof“leasepremiumarrangement”for10-21years(sublease)• Inreturnforalumpsum“leasepremium”
Held:capitalexpense
o Reason:• Again, the courtwas forced to chooseeither capital or revenue treatment,without the
optiontoamortise(lumpsumàacquireleaseagreementàcapitalassetàcapitalinnature)(differentfromBP)
• The2casesweredecidedconsequentlybythesamejudgeso CGTasset?(lease,severalleases)o Costbase?(yes,asassetàleaseincludepremiumamount/notentire)o Timeof recognition? (F1àleasepremiumgranted,bringwhole amountup frontàatend/up
front/amortise)o cf.accountingtreatment?o CGTimplicationsforlessor?
• CGTeventF1
Purchase Price of Capital Assets o Ingeneral,capitalexpense
Variationsinform:o Rentalpayments(revenueinnature)o Lumpsumplusperiodicalpayments(notstoptestingcapital,becauseovertime)o Periodicpaymentsbasedonincomefromasset(percentageofwhereincomegenerated)o Periodicpayments:partofpurchaseprice?
Clif fs International (1979): Fact:
o TaxpayerpurchasedsharesinaminingcompanyConsideration:
o Lumpsumplus“deferredpayment”of15centspertonofironoreextracted(ifany),ando Royaltiesfromconsortiumwhichminedtheore
Held:revenueexpense(3:2decision)(notacquireactualassetàthedeferredisironore)
Colonial Mutual L i fe Assurance Society Ltd (1953): o Fact:
• Taxpayerpurchasedland• Consideration:90%ofrentsfromshopsonthelandfor50years• Chargeonthelandassecurityforpayments
o Held:capitalexpense• “Themoneyarepaidinordertoacquireacapitalasset”• Recurring expenses: not always revenue in nature (all for acquisition of asset, not for
anythingelse)o Cf.CliffsInternationalo Whatabouttherecipient?Taxableonthepayments?
• Yes:Just(nature/capacitynothavetomatch)
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Case Analysis: Cityl ink Melbourne Ltd [2006] HCA 35 Incometaxissues:
o Historicalcostbasis(tenderprocesses)o NoconceptofPV/timevalueofmoney
o Opportunity of timingmanipulation(amountofdeduction)
Whole sectionof document to forma bigcontract
Design construct and maintain overconcessionperiod
Concession fee: each year, right to useroadàpay semi-annually; but never paidanymoneyactually,issueconcessionnotes
Before 1996: I owe you notes issued tostate,unlessroadrevenue,ifcostofproject<roadrevenue—notpaymentuntil2034.
Dischargedliabilitytopayconcessionfeebyanotherliabilityànotpayableuntil2034
Additionalfacts:
o $3bproject(largesturbaninfrastructureprojectinAustralia)(notinterestbearing)o Concessionfees:payablesemi-annuallyo Concessionnotes:non-interestbearingo Any amount owing to the State: not due for payment until sufficient fund in Distributions
Accounttomeetthepaymentinfull(profitafterallexpenses)• i.e.surpluscashaftermeetingallexpenses• effectivedeferralofpayments
o Presentvalueofconcessionnotesinquestion(foryears1996to1998):closetonil(PVofit)
Issues:
o “Incurred”?o Capitalexpense?o Sharesofprofitsinsteadof“expense”?(splitcollection)o ATO v Citylink arguments? (ATO: not incurredàstill constructing, not intention to construct,
absolute intention concession was contingent reach target, future expenses—meet futurerevenue/deduction in future timeà referable in future when payment dueà proportionàcapitalinnature)(Citylink:produceagainstAI,referabletocurrentyear,concessionfee,notgetasset,noanyactualasset,noenduringasset)
ATO missed opportunities o Presentvalue(nexttonothing)
• Carden’scase:“correctreflexoftrueincome”(correctreflectionofincomeposition)§ Firstinstancepara87&150§ FullFederalCourtpara36§ HC:refusedleavetoamendgroundsofappeal
o Part IVA (anti avoidance provision, obtain tax benefit, PV of concession notesà notàmissappropriatemakesense)
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• Firstinstancepara145• cf.HCjudges’perception:para99&121
o Capital expenses: concession fees for construction period: (right on the land—profit yielding)(upfrontperiod)• FullFederalCourtpara65
Decisions:
o FirstInstance:• Twoarguments:
§ Capitalexpenses:blackholeexpenditure• Now:5-yearamortisation:s.40-880ITAA1997
§ “shareofprofits”:weakargumento FullFederalCourt:fullydeductibleo HighCourt:5:1majority(upfrontineachexpenseyearàtimeofdischargeofliability)
• “incurred?”: Judges bounded by precedents (except Kirby) (not incurred until paid, nodeduction,allwordingsondischargeàtimingofliabilityàstillhavetopay,buttimeisnowpusheddown.)(notaboutdischarge)
o Anomaly• “such an outcome might be seen to be something that might only be expected in a
taxpayers’heaven”(massivelosses,justplayontimevalueofmoney)o Now: TOFA (big taxpayer, gain/loss over time period (concession)à accrued referable every
year)
Year 0 1 2 3 4 5 6 7 ... 37Interest($M) - 0.28 0.31 0.34 0.37 0.41 0.45 0.5 ... 8.69PV+Interest($M) 2.8 3.1 3.4 3.7 4.1 4.5 5 5.5 ... 95.6Assumption:Discountrate=10%;AmortisebasedonPV,ratherthanupfrontoratend.
(IssuesdecidedbytheHighCourt:
The question for the Court was whether the concession fees claimedwere allowable deductionsunder subsection 51(1) of the Income Tax Assessment Act 1936 (years ended 30 June 1996 and1997) and section8-1of the IncomeTaxAssessmentAct1997 (yearended30 June1998). In thisregardthereweretwoissuesthathadtobedecidedbytheCourt:
1. Whether,theamountsinquestionwereoutgoingsincurredin,andproperlyreferableto,theincomeyearinrespectofwhichtheyaccruedpayable;and
2. Whethertheconcessionfeeswereoutgoingsofacapitalnature.
Answertothefirstissue
• The majority of the High Court (Gleeson CJ; Gummow, Callinan and Heydon JJ adopting thewrittenjudgmentofCrennanJ)held:
• TheconcessionfeeswereincurredintherelevantyearofincomebecauseTransurbanwasunderacontractualliabilitytomakethepaymentsintherelevantyear;
• TherewasacontractualliabilitytopaytheconcessionfeesirrespectiveofthesubordinationoftheState'srighttopaymentortheconcessionnotemechanismfordischargingtheliability;
• Conditionsaffectingthetimingofdischarge(butnotthecreationoftheliability)doesnotrendertheliabilitycontingent;
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• Transurban was definitely committed and had completely subjected itself to the outgoingswhichtheconcessionfeesrepresent;
• Theconcessionfeeswere,likeanyperiodiclicencefee,payableforitsperiod.Theoutgoingsdidnotsecurerightsinfutureyearsandwerereferabletotheincomeyearsinquestion.
Answertothesecondissue:
• ThemajorityinagreeingwiththereasonsofJusticeCrennanheldthattheconcessionfeeswereofarevenuenature.TheconcessionfeeswerecharacterisedasperiodiclicencefeesinrespectoftheCityLinkinfrastructureassetsthatultimatelymustbesurrenderedtotheStateincontrasttoperiodicinstalmentsofthepurchasepriceofacapitalasset.
Implicationsofthedecision:
• The result of this case flows from the disposition of themajority to view the concession as alicensingarrangementandtheconcessionfeesasperiodiclicencefees.
• Thedecisionentrenchesajurisprudentialapproachforthedeterminationofwhenanoutgoingisincurredforthepurposesofthegeneraldeductionprovisions.Inthisregarditplacesimportanceon a legal analysis of the arrangements to distinguish between conditions that concern thecreationofliabilityandconditionsthatmerelyaffectdischarge.
• Other thandistinguishing the situation inColesMyerFinance, thedecisiondoesnot shedanyfurtherlightontheproperlyreferableprincipleaspreviouslyarticulatedandappliedbytheHighCourt.
• As the majority view amounted to an application of existing principles governing thedeductibilityoflossesandoutgoingsunderthegeneraldeductionprovisions,itisnotproposedto amend current Tax Office Rulings (most relevantly TR 94/26 and TR 97/7 dealingwith themeaning of incurred and the application of the properly referable principle) or issue furtherinterpretativeadvicedealingwiththedecision.)
W9—Specific Deductions 1. SpecificDeductions(AI—Deduction=TI;Deduction—General:8-1,specific:others)2. CapitalAllowance3. SpecialCapitalAllowanceRegimes4. CapitalWorksDeductions
Revision + Feedback o The three tests for capital expenses are (1) ____________; (2) ____________ and (3)
_____________.o Theprovisionoflastresorttodealwithblackholeexpensesissections.40-880ITAA1997.That
sectionallowsamortisationofeligiblecapitalexpensesover5years.o A company incurred $300,000 for a feasibility study investigating a proposal to establish a
subsidiaryinChina.Intheend,thecompanydecidednottogoaheadwiththeproposal.Whatshouldbethetaxtreatmentofthisamount?(feasibilitystudyàdecidewhethertostartànot8-1committedtobusiness;Blackholeexpense—candeductcapitalexpense,supposedtocarryon,amortisefor5years,notlumpsum)
o A lumpsumpaymentmadebyacompany topurchaseacapitalasset is likely tobecapital innature.However, thenaturemaybedifferent if thepayment ismadeonaperiodic/recurrentbasis.
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o The regular payments to purchase capital assets in Cliffs International case were held to berevenueinnature.(ironore,3rdpaymentcalculatepertoneofore)
o Incontrast,similarpaymentsinColonialMutualLifecasewereheldtobecapitalinnature.Thisis despite the fact that the recipient of those payments were taxable upon ordinary incomebase.(just)
Specific Deductions o Definition:s.8-5(3)ITAA1997o Deductionsspecifically:
• Allowed:s.8-5(1)(notcite,useactualsection)• Denied/limited:s.8-5(2)
Deductions Specifically Allowed o Division25ITAA1997:generaldeductionrulesmaystillapply(specificdeduction25,notmean
not deductible under 8-1à25 not as good as 8-1) (subscription of membershipà8-1betteràspecific:upto42,anti-overlap,onlyoneà6-25mostappropriate)
Tax-related expenses: “managing your tax affa irs”: s . 25-5 ITAA 1997 o Definitionof“taxaffairs”:s.995-1(1)
§ “Taxaffairsmeansaffairsrelatingto*tax”(definedterm)o Nodeductionfor:(exclusion)
o Advicefeesunlessadviceprovidedby“recognisedtaxadviser”:s.25-5(2)(e)§ Taxagents/lawyers(mustbewhoarepaying)(accountanttaxreturnfeeàdeductible)
Bad debts: deductible i f : s . 25-35 ITAA 1997 o Baddebtwrittenoffintheincomeyear,and(owemoney,notpay,writtenoff)o Amount included in A.I. or in respect of money lent in money-lending business (if lend
moneyàordinary business tomarket at large, revenue basis, ordinary business expenditure/not get paid, liquid creditor arrangement get less debt—must be existing debt, but need tomakeefforttocontactdebtor)(actuallygetdebt)(Notjustadeductionforalldebtsnotreceivedyet,toaverseaccrual,accrualbasisnotcashbasis,accrualincomeàincludedinA.I.ànotgetanymoreàreverse)
Repairs: s . 25-10 ITAA 1997 o Youcandeductexpenditureincurredtorepairpremisesoradepreciatingassetif:
• Assetusedtoproduceassessableincome(rentalproperty)• Expenditurenotcapital
o Capitalexpenditure:(notdeductionunder25-10)
• Tax-relatedexpensesSecpon25-5• RepairsSecpon25-10• LeasedocumentexpensesSecpon25-20• BorrowingexpensesSecpons25-25• BaddebtsSecpon25-35• LossbytheÑetcSecpon25-45• PaymentstoassociaponsSecpon25-55• Uniformcapitalallowance&Div328(SBE)Division40• CapitalworksdeducponDivision43
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• Replacements• Improvements• Initialrepairs
o Notional expensesnot deductible (notactually spendmoney, irrelevant—only lookatmoneydoesspend)
Replacement of a whole asset: Lindsay v FCT o Shiprepairingbusiness(shipmarina,buildanewone,longer)o Ldemolished1ofitsslipwaysandreplacedito Larguedslipwaywaspartofitsbusinesspremisesorpartofthehaulingmachineryo Question:whetheritiscapitalexpenditure?
Held:notarepair(themarinaàcapital,notdeductibleunder25-10)
o Slipwaywasanentireasseto Renewalinthiscasewas‘reconstruction’oftheentirety(demolishandreplace,fixeduptoback
tooriginalposition)
“Repair” vs “improvement” o Aquestionoffactanddegree:Lindsayo Workdonetorestoreanassettoitsoriginalstateà“repair”o Workdonetoimprovetheassetoveritsoriginalstateà“improvement”àcapitalexpenditure
Improvements: BP Oi l Ref inery o BPranoilrefineryo Refinerywassupportedbywoodenpylonswhichwerebeingerodedo BPcoveredthemwithconcretetopreventfurtherdamageo Theconcretedidnothaveanyeffectonthepreviousdamage
Held:improvement,notarepair
o Theconcreteimprovedtheabilityofthepylonstowithstandfurtherdamage(nottheoriginaldamage)(claimasrepair,butbeyondoriginalposition,lastlonger)
Improvements: Western Suburbs Cinemas o Cinemareplacedtheceilingo Architect decided itwas impractical to repair the ceilingwith the samematerials because far
superiormaterialswerenowavailable(usemoreexpensiveone)
Held:improvement,notarepair
o The work did much more than meet a need for restoration; it provided a ceiling havingconsiderable advantages over the old one (grey area: roof as its own, not aswhole, notionalexpenseconcept:expensiveandcheapmaterials,choosetheexpensive,wouldhavedeductionifchoosecheaponesànotexpenseanymoneyoncheapmaterialàonlylookatmoneyspendàcannotdeductthecheapamount)
In it ia l Repair : W. Thomas & Co . Fact:
o taxpayerjustboughtabuildingo performedrepairworktobuildingbeforeitcouldbereadyforuse
Held:capitalexpenditure
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Reasons:o “Expenditureupon repairs isproperlyattributed to revenueaccountwhen the repairsare for
themaintenanceofanincomeproducingcapitalasset…Butifwhenathingisboughtforuseasacapitalasset…itisnotingoodorder…thecostofputtingitinordersuitableforuseispartofthecostofitsacquisition,notacostofitsmaintenance”(buyincomeproducingasset,onlylookatrepair,notacquisitioncost—putingoodorder)
In it ia l Repairs: Law Shipping Co Ltd v IRC (1923) o Taxpayeracquiredashipwhichrequiredarepairo Undertook1voyage,thenrepairedit
Held:capitalexpenditure,notarepair
o Thecostofthis‘initialrepair’formedpartoftheacquisitioncosts,thereforewascapital(InitialrepairtobringshipinworkingconditiontoproduceA.I.)
o Taxpayerwouldhavepaidalowerpricefortheshipduetotheneedforrepair***o Expenditurewasnecessaryatthetimeofpurchasetorendertheshipserviceable
In it ia l Repairs: Taxation Rul ing TR 97/23 o Anassetwillbeanentiretyifanassetifit:(summarisecaselaws)
• Isseparatelyidentifiableascapitalequipment• Providesafunctiononitsown• Isadistinctitemofplant,or• Isa‘unitofproperty’asperthedepreciationrules
o Initialrepairsarecapitalandnotdeductibleifthedefect:• Existedatthetimeofpurchase• Didnotarisefromtheoperationsofthepersonwhoincurstheexpenditure
Notional Repair: Western Suburbs Cinemas o Fact:o taxpayertriedtodeductnotionalrepaircostofceilingofcinema,whichwasreplacedwithnew
ceiling
Held:notdeductible
Reason:o “whenataxpayerhastwocoursesopentohim,oneinvolvinganexpenditurewhichwillbean
allowablededuction…andtheother…not…anallowablededuction,andforhisownreasonshechoosesthesecondcourse,hecannothavehis incometaxassessedas ifhehadexercisedhis choice in the opposite way” (cannot pretend do on original material) (demolishedànotimprovementàrestoresomethingthere,notgetridofàstillgetexistingàdifferencebetweenimprovedmaterialandnon-improvedmaterial)
Deductions Specifically Denied o Nodeductionsfor:(26specificallydenied,evenoverride8/25—evendeductibleunder8)o Penalties:s.26-5ITAA1997(fine,notcivilpenalties, it isstateandfederalfine)(speedingand
parkingàeventhoughwhileworko Expenditurerelatingtoillegalactivities:s.26-54(drugcarryingànotdeductible)o Provisions for leave: s. 26-10 (not deductible until leave, set aside provision know, meet
liabilitiesinthefutureàwant&actuallytakeleave&Ipaythem;notsalary,notforworkingpurpose)
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o SeeDivision26
Bribes o Bribestopublicofficials:s.26-53
• You cannot deduct…a loss or outgoing you incur that is a *bribe to a public official(domestic)
o Cf.rulesonbribestoforeignpublicofficials:s.26-52• Youcannotdeduct…alossoroutgoingyouincurthatisa*bribetoaforeignpublicofficial
…Anamountisnotabribetoaforeignpublicofficial if(a)thevalueofthebenefit isofaminor nature; and (b) the amount is incurred for the sole or dominant purpose ofexpeditingorsecuringtheperformanceofaroutinegovernmentactionofaminornature…(jurisdictionwherebribe isàbusiness, commonly knowncorrupt act, incentivepayments,notoperateuntilbribe)
Depreciation for Capital Expenditures 2mainDivision:(cannotbeboth,mutuallyexclusive)
o “Depreciatingassets”:Division40ITAA1997o “Capitalworks”:Division43(buildingsànotfixturesinbuildings,theactualshelfshed)
• ExcludedfromDivision40:s.40-45
Capital Allowance o Deduction fordepreciatingassets:s.40-25(1) ITAA1997 (uniform,allowdeduction forcapital
expenses,)• Scope:“depreciatingasset”:
§ Definitionins.40-30ITAA1997• Taxpayer: “held” (to get deduction, otherwise lump sum—big deduction at first, flat out
expense—nothinglater)§ Definition:s.40-40ITAA1997§ Include:“owner”oftheasset:item10(butunclearforcertainleases)
• Amount:“declineinvalue”(notcalldepreciationintax=depreciation)o Subjectto:
• Apportionment rule: s. 40-25(2) (partially for business and partially for personal;businessàprivate—only deduct for time for businessàstill hold though; do you getdeductionfordeclineinvalueàbusinessonly)§ “Taxablepurpose”:s.40-25(7)
Depreciating Asset o 40-30(1)Adepreciatingassetisanassetthathasalimited*effectivelifeandcanreasonablybe
expectedtodeclineinvalueoverthetimeitisused,except:• (a)land;or• (b)anitemof*tradingstock;or• (c)anintangibleasset,unlessitismentionedinsection(2)(otherregime)
o 40-30(2) These intangible assets are depreciating assets if they are not *trading stock:(exhaustivelist)• (a)*mining,quarryingorprospectingrights…• (c)Itemsof*intellectualproperty…(arts,patents,depreciableasset)
o USamortisation regime foracquired intangibles covers: (compare, intangible listbroader thanAUS)• Goodwill
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• listsofcurrentandprospectivecustomers• formula,knowhow,franchise,trademark,tradename• covenantnottocompete• “customer-basedintangibles”(e.g.marketshare)• “supplier-basedintangibles”(e.g.favourablesupplycontract)
Decline in Value o “starttime”:(Whenstartdeclineinvalue—takeoutofbox,readyforyoutouseit)
• “firstuse”or“installedreadyforuse”:s.40-60ITAA1997o 2Alternativemethodsforeachdepreciatingasset:s.40-65(assetbyassetbasis,appropriate)
• Primecost(i.e.straightline):s.40-75§ Cost/effectivelifeXDaysheld/365(samecost)
• Diminishingvalue:s.40-72§ Basevalue/effectivelifeX(Dayheld/365)X200%(basevalue=costinyear1,Y2:cost
–lastyeardepreciation,keepreducingvaluedepreciationfor)§ Notavailableforcertainintangibleassets:s.40-70(2)(practicepurpose)
• Cannot change method once chosen: s. 40-130(2) (asset by asset, can choose differentmethod, but cannot change one asset) (if choose diminishing value—bigger up frontdeduction, but switchàdeduction is larger than cost) (diminishing value—deduction arebiggeratfirst)
Year 1 2 3 Valuec/f
PrimeCost 100 -10 90 -10 80 -10 70
DiminishingValue 100 -20 80 -16 64 -13 51
80—adjustablevalue,20—higherdeduction,70—adjustablevalue
Effective Life o Achoicebetween:s.40-95(1)ITAA1997
• “Self-assessing” and (justify, expert compare and assess, flexible reflection of incomeposition,wearandtireoncertainassets,claimover,quarentitysuvieradvice)
• Commissioner’sfigures:TR2015/2 (howlongthatlastoruse,choice)(listeveryassetandtelleachifuseit,safe)
o except:statutoryfiguresforcertainintangibledepreciatingassets:s.40-95(7)• Forexample,standardpatent(20years);registereddesign(15years)(standard,cannotself-
assess,cannotchange)o “Self-assessing”:
• criteria: “reasonably wear and tear” and “reasonablemaintenance”: s.40-105 ITAA 1997(notcompletelydestroyed)
• maychangedueto“changedcircumstances”:s.40-110(canreassesslife,morereflectiveonwearandtire)
Cost o 2elements:s.40-175ITAA1997(reducecostofassets)o 1stelement:“theamountyoupay”toholdthedep.asset:s.40-185(1)item1o subjecttovariousadjustments:(relatedparty)(anti-avoidancereason)
• m.v.substitution:s.40-180item8• apportionment:s.40-195(2assets)
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• nodoublededuction:s.40-215(basedonMV)• excludenon-capitalexpense:s.40-220(deductmoreotherwise)
o 2ndelement:• amountpaidtobringtheassettoitspresentconditionandlocation,and• Expenditurereasonablyattributabletoabalancingadjustmentevent:s.40-190ITAA1997
(=dispose,bothsale& )o cf.definitionsofc.b.andr.c.b.:whydifferent
• (depreciation is not equal to CGT, depreciation is to pick up expenditure through life,periodical;CGTiscostbaseandreducedcostbasewhollyatend)
Balancing Adjustments o Definitions:s.40-285ITAA1997
• “balancingadjustmentevent”§ definition: s.40-295 ITAA 1997 (e.g. cash register upgrade) (balance depreciate
adjustment,depreciationclaimed,actualMV,toomuchdepreciationornotdepreciateenough—deductatend)
§ include“stopholdingtheasset”,“stopusingit”forever• “terminationvalue”(gettherestofdeductionnotclaimed,evennotholdassetanymore,if
TV>AV—differenceincludeinAI,ifTV<AV—differenceasdeduction)§ definition:s.40-300ITAA1997§ basically,disposalproceeds:s.40-305§ subjecttoadjustmentrules,e.g.
ü m.v.substitution:s.40-300item6 ü apportionment:s.40-310
• “adjustablevalue”§ definition:basically taxwrittendownvalue + addition to2ndelement: s.40-85 ITAA
1997o Differencebetweenterminationvalueandadjustablevalue(40-285)
• A.I.ordeduction§ reconciliationbetweenactualdeclineinvalueandcapitalallowanceallowed
o ReconciliationwithCGTregime• Ingeneral,disregardcapitalgain/lossondepreciatingasset:s.118-24ITAA1997• (use different concepts, CGT andDepreciable assets, if depreciate assetwholly, not CGT,
180-4, wholly taxable purpose,partially privateàCGT event except CGT K7, not use CB,RCB,usedepreciation,usecostofasset,notCB)
Special Capital Allowance Regimes Small Cost Assets o Immediatededuction:s.40-80(2)ITAA1997(cheap)o conditions:
• costnotexceed$300• UsedpredominantlyforproducingA.I.• notusedinabusiness,and• totalcostofidenticalassetsorsetofassets:not>$300• (rental/residential/investmentproperty—fixturesimmediatedeductible)
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Low-value pool o Taxpayercanchoosetopoollow-costandlow-valueassetsanddepreciatethepoolover4years
(atacceleratedrates)underdiminishingvaluemethod:s.40-440ITAA1997(fullrate/halfrate)o conditions:
• low-costassets:cost<$1,000+“allin”rule:s.40-425(2)&40-430(1)§ Ifchoosetopool,alllow-costassetsmustbeallocatedtopool;taxpayercanchooseto
allocate low-value assets (once have, forced to put all low cost asset inside, >1000,holdforawhile,<1000)
• low-valueassets:taxwrittendownvalue(underd.v.methodonly)<$1,000:s.40-425(5)o irrevocable choice:s.40-430(2) (hard toget ridof,holdasset togetherandasoneasset,basic
standard rates, other option accelerate rate, depreciate quicker) (cannot unwind—only candepreciateallandnotbuynew)
Concessions for SBE (small business entity) o Subdivision328-DITAA1997o Assetswithcost<$1,000:immediatededuction:s.328-180
• Temporary increase of threshold for assets acquired between 12May 2015 and 30 June2017:costofasset<$20,000(turnover<6million)§ Threshold was increased to $6,500 for assets acquired between 1/7/2012 and
31/12/2013o Otherassets:basicallydepreciate inapoolingsystemat30%underdiminishingvaluemethod
(immediatededuction, SBE—sonot lowvaluepool, small businesspool,most assets—generalpool/longlifepool:depreciateasone,halfrateif50%)
SBE Pool o onceinthepool,notoutevenifstopbeingSBE:s.328-185(7)ITAA1997o ifvalueofpool<$1,000,fullydeductible:s.328-210o firstyeardepreciation:athalftherate:s.328-190(2)(yearbuyassetandputitinuse)o disposal:proceedsdeductedfrompool:s.328-200
• ifvalueofpoolbecomesnegative:A.I.:s.328-215(method:overdepreciation)
Project Amount o basicallydepreciatethepoolover“projectpoollife”underd.v.method:s.40-830ITAA1997
• Project life:numberofyears that theprojectwilloperate:s.40-845 ITAA1997 (predictedamounts)
o definitionof“projectamount”:examplesofex-blackholeexpenses:(blackholeexpenditure)• create/upgradecommunityinfrastructure• sitepreparation• feasibilitystudyforprojectthatiscarriedout• (poolprojecttogether,poolalltogether)
Business Related Costs o depreciateover5yearsonstraightlinebasis:s.40-880ITAA1997(blackholeexpenditure)
• Originalprovisiononlycoveredcapitalexpendituresoncertaintransactions,including:§ businessstructure(restructure)§ equityraising§ defendingagainsttakeover§ liquidatingacompany
• Currentprovision:comprehensivescopecovering“businessrelatedcapitalexpenditures”
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§ Proposal:immediatedeductionofcertainSBEstart-upexpenseso A“provisionoflastresort”(doeverythingelsefirst,CGT,Blackholeexpenditure)
Car Limit o Cars:costlimitedto“carlimit”:s.40-230ITAA1997
• $57,466for2014-15and2015-16(onlybuyfor$57,466,limitedtothatamount)o Whythelimit?(partiallyisforprivatepurpose,limitstaythesame)
Capital Works Deduction Capital Works (buildings) o definitionof“CapitalWorks”:s.43-20ITAA1997o includes:(before:confinedsetofbuildings,forspecificpurposeàexpanded)
• building, extension, alteration or improvement since 22/8/1979 (dates***, not any CWdeductiblebefore)
• “structural improvements” since 27/2/1992, e.g. sealed roads/driveways, bridges,pipelines,dams
• environmentprotectionearthworkssince19/8/1992• (originallynothavedepreciatedfirst,notusebuildinginbusiness,justcarryonbusinessin
building(location)àroughdecision)o conditions:s.43-10ITAA1997
• “constructionexpenditurearea”(land,workoutconstructionexpenditure)• “poolofconstructionexpenditure”(amountofmoneyspend)• eligibleuse(table)
o deduction limited to “un-deducted construction expenditure” (full percent, highuseàfactor/motel)• basedon“useperiod”(firstuseàendofproceedingyear)
§ basicallyfromfirstusetoendofprecedingyear:s.43-230(2)(quantity)• include“notional”capitalworksdeductions(whatistheconstructioncostofCW,notmark-
upvalue(MV/purchaseprice),onlyconstruction,straightline,Xdaysbuild/365)o timing:
• after“completionofconstructionofthecapitalworks”despiteusebeforecompletion:s.43-30ITAA1997
o deductionformula:• basedon“yourconstructionexpenditure”:s.43-210&43-215
§ definition: portion of “pool of construction expenditure” attributable to the“constructionexpenditurearea”that:ü thetaxpayerowns:s.43-115,or(straightline%)ü the taxpayer,who incurred theexpenditure, continues to lease thearea:s.43-
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Deduction o Depreciation rate: (dates***) (only industrialactivity full) (distinguishpurchaseprice, takeout
builder’smarkup)• 2.5%or4%dependingonuseanddateofcommencementofcapitalworks:s.43-25,43-140
&43-145• Forexample,rentalproperty:2.5%(4%ifconstructioncommencedbetween22/8/84and
15/9/87)o TR97/25:Exampleof“Guiseppethebuilder”
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http://law.ato.gov.au/atolaw/DownloadNoticePDF.htm?DocId=TXR%2FTR9725%2FNAT%2FATO%2F00001&filename=pdf/pbr/tr1997-025c1.pdf&PiT=99991231235958
Balancing Adjustment—Destruction o if allorapartof yourcapitalworks isdestroyed,deduct “balancingdeduction”:s.43-40 ITAA
1997o “balancingdeduction”:s.43-250
• basically“un-deductedconstructionexpenditure”lessamountreceivedforthedestruction(balanceoutdepreciation)
Balancing Adjustment—Disposal o Nobalancingadjustmentforothercases:why?(justfordestructiontakeoutdeduction,D43)o dealwithunderCGT
• CGTeventA1• Adjustmenttoc.b.andr.c.b.:reducebytheamountofcapitalworksdeductionclaimedon
theproperty:s.110-45(2)&110-55(4)o WhynotconsistenttreatmentasCapitalAllowance?
• cf.RalphReportrecommendation(regimeuseitsconcepts,exceptdepreciationconcepts)
Ralph Report recommendation o Problemsofexistingregime:APlatformforConsultation:
• statutorylifevseffectivelife§ e.g. different quality of building materials (D43 not as reflective of quality and
materials,notreflectdifferentbuildings)§ wrongdepreciationamount(basedonpurchaseprice)
• constructioncostvspurchaseprice§ wrongdepreciationamount(flat—samelife,notconsideractuallife)
ü internationalcomparison:mostdevelopedcountries,includingtheUS,Germany,Japan,etc.,adoptpurchaseprice
ü onlymajorexception:theUK:AnInternationalPerspective• complexrulesàhighcompliancecosts:
§ improvementtoexistingbuilding:treatedasseparateassetforcapitalworksdeductionpurpose(passcosttonextperson)ü additionalrecordkeeping
§ constructioncostrecords:ü havetobepassedontoeachsubsequentowner;orü professionalvaluations
o Ralphrecommendation:sametreatmentasforotherdepreciatingassets• notimplemented(uniformcapitalallowance)
W10—Tax Accounting 1. Overview(timing)2. Cashvsaccrualbasis3. Meaningof“derived”4. Meaningof“incurred”5. Tradingstock(timing,ownregime)
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Review + Feedback o Acompanycarryingonaretailbusinesscandeductabaddebtinanincomeyearif(1)incomein
thatyear;and(2)writtenoffinthatincomeyear.(accrualbasis)o Peter incurred $70,000 to repair the office premise he purchased in this income year before
movinghisbusinessin.Hecandeduct$0inthisincomeyearunders.8-1ITAA1997.(premise—assetaccount,8-1àrevenueaccount)
o Intellectualproperty isdefinedtomean(1)patent (2)copyright;and(3)registereddesign. (s.995-1)
o Depreciationassetsexclude(1)land;(2)tradingstock;and(3)intangibleasset—listo A taxpayer in general can choose between prime cost and diminishing value methods to
calculatecapitalallowance.o Disposalofadepreciatingasset isaCGTA1 (Case7) eventaswell asabalancingadjustment
event (depreciation regime), but it is dealt with exclusively under the depreciation regime.(uniform)
o Ataxpayer ingeneralcandeduct immediately thecostofadepreciatingasset if itscost isnotmorethan$300.Thethresholdisincreasedto$2000forSBEuntil30June2017.
o Whenadepreciatingassetisdisposedof,thetaxpayerhastocompareterminationvaluewithadjustablevaluetodeterminethegainorlossondisposal.
o Garysoldhis investmentpropertyfor$900,000 inthis incomeyear. Heacquiredthepropertyfor$500,000tenyearsagoandhasclaimedcapitalworksdeductionsof$120,000. Hiscapitalgainfromthedisposalis$900,000–380,000=520,000(à&discount)beforediscount.(D43—Totheextentdeducted,D43—deductpurchaseprice,reduce1stelementofcostbase500,000byamountdeducted(preventdoublebenefit);affectcostbaseaddordeductelements (CGT))(Costbase:380000)
o Ataxpayeringeneralcanchoosebetweenself-assessmentandcommissionertodeterminetheeffectivelifeofadepreciatingasset.
Overview—tax accounting o Whyistaxlawsocomplex?
• Time• Space• JohnPrebble,“WhyisTaxLawIncomprehensible?”(1994)BritishTaxReviewno.4pp.380-
393http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1681810o Time:
(3)Incomelatter,deductioninfront
(1) Deduction not need to be sameyear,notneedmatch
o Space:Sales=$100MTotalcost=$80MGroupprofit=$20MParent:CMC(centralmanagementcontrol),R&DS1:manufactureS2:sales&marketing
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Carryoutbusinessasagroup,intragrouptransactionsS1àS2
Annual Accounting o “Yourincometaxisworkedoutbyreferencetoyourtaxableincomefortheincomeyear”:s.4-
10(2)ITAA1997• Theoreticallynotaccuratemeasureofabilitytopay:(accountonyearbyyearbasis)(self-
assessment)§ fluctuationofincome(cyclicaltypeofbusiness,snowfields)§ progressivetaxrates§ changesintaxrates(differententity,arbitrage)
o Inpractice,alwaysperiodic:why?(easytomakeeveryonepayeveryyear(notabilitytopay)
Cash vs accrual basis Income: “Derived” o “derived…duringtheincomeyear”:s.6-5(2)ITAA1997
• definition:s.995-1ITAA1997§ only refers to s.6-5(4) ITAA 1997: constructive receipt rule (not actually receive,
assume to receive, instruct somebody to payàget benefit) (derive include ordinaryconceptandconstructivereceiptrule)
o Somestatutoryruleson“derived”:• e.g.“paid”fordividend:s.44(1)ITAA1936(SI:notactuallyconceptofderivationàtiming)
o Caselaw:2issues:• Cashvsaccrualbasis?(cash:allaboutreceiptàifreceive—derived,e.g.interest,6-5derived
interestincomewhenreceived;accrual:whengetrighttoreceiveit—inappropriate)• Ifaccrual,timingof“derive”?
Cash vs Accruals Basis o Cashbasis(receiptsbasis):(cashvsaccrual—incomeàwhen
• incomeanddeductionsrecogniseduponcashreceiptsandpayments(Proxy)o Accrualsbasis(earningsbasis):
• incomerecognisedupon“arighttoclaim”(includeinAInow,notmatternotreceivedyet)• deductionsupon“anobligationtopay”
Carden’s Case Fact:
o taxpayer:medicalpractitionero preparedaccountsoncashbasiso afterhisdeath,paymentsreceivedforoutstandingaccountso Taxoffice:arguedthatDrCardenshouldhaveadoptedaccrualsbasis (put inhisstates,should
accountwhenreceivebill)
Held:cashbasis
o Reasons:o taxlawingeneralsilento choice “must depend upon its actual appropriateness” to give (choice not prefer, but
appropriate)• “asubstantiallycorrectreflexofthetaxpayer’strueincome”(cashoraccrual)
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o “aquestionoffact”(accordingtoyourcondition,ifgivetruereflection)
Henderson o AfterCarden’scase,ATOadoptedcashbasisforallprofessionalso PositionchallengedinHenderson
Fact:o taxpayer:partneroflargeaccountingfirmo bothtaxpayerandpartnershipusedtoadoptcashbasis(swaps)o partnershipchangedtoaccrualsbasisin1965;taxpayerfollowedo Commissionerinsistedoncashbasisàprofessional
Held:accrualsbasis
o Reasons:o s.90& 91 ITAA 1936: partners pay tax on their shares of income derived by the partnership
(includesharesinAI,partnershipprovision,netincomeofpartners)o taxpayershouldfollowaccountingmethodofpartnershipo Accrualsbasis:appropriateforlargeaccountingfirm(c.f.Carden’scase:solepractitioner)(what
isappropriate—correctforswitch–acceptable)o “asubstantiallycorrectreflexofthetaxpayer’strueincome”
Year1partnershipswapped Year2Cash basis here, I do issueàbill, not included, notderived
Accrualbasis,payintheY2,notderived—righttoclaim
Firstenberg o AfterHenderson,ATOchangedpracticeandadoptedaccrualsbasisforprofessionalso LedtoyetanotherchallengeinFirstenberg
Fact:o taxpayer:solicitorinsolepractice(soletrader)o adoptedcashbasisfor20yearso Commissioner:requestedchangetoaccrualsbasis(professional)
Held:Cashbasis
o Reasons: (becausesmallàthesmaller, thesimplertheaffair,employeeàcashbasis; ifbig,cancirculatingcapitalàaccrual)
o circumstancesverydifferentfromHenderson(viz.solepractitionervslargeprofessionalfirm)o accrualsbasisforthetaxpayerwouldbe
• “anartificial,unrealandunreasonablyburdensomemethod”• i.e.appliedCarden’sprinciple
Summary—General rule o acorrectreflexofthetaxpayer’strueincomeo aquestionoffact(basedonyourfactsandcircumstances)
TR 98/1 o Though legally binding ruling, disclaimer by ATO: (guides/factors to work out what is
appropriate)• theruling“isnotintendedtobeprescriptive;ratheritshouldbeusedasaguide”
o Cashbasis:“likelytobeappropriate”for(Notahardenfastenrule)• employmentincome
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• personalprofessionalservices• investmentincome(dividendinterests)
o Accrualsbasis:“inmostcases”appropriatefor• tradingandmanufacturingbusinesses
Deeming Rules on Receipts o Non-cash receipts: (Assume market value deemed consideration received/paid à pay on
moneyamount)• marketvalueofconsideration:deemedtohavebeenpaid:s.21ITAA1936
o Constructivereceipts:• deemedreceiptiftheamount“isappliedordealtwithinanywayonyourbehalforasyou
direct”: s.6-5(4)& 6-10(3) ITAA 1997 (direct to pay somebody,my choice, not turn anyincomeintoincome,notmakeanythingnotincomeincome,ifnothavebeneficialentitleànotincome)
• onlyappliesafterestablishingthatamountinquestionis“income”:Howell
Cash Basis—Deduction o “Cashbasisforincomeàcashbasisfordeductions”:logical?(8-1incur—totheextent)
• Supported by English income tax rules, Asprey Report, Parsons: Income Taxation inAustralia
• Somearguethat“incurred”impliesaccrualsbasisfordeductions§ e.g.ATO:TR97/7para.9
o Inpractice,ATOposition:• Providedconsistentoveryears,taxpayersadoptingcashbasisforincomecanusecashbasis
fordeductions:TR97/7para.12
“Derived” Recognition of Income o Timingof“derivation”underaccrualsbasis?(notclearcut,notlikecash)
Example:(properyears,righttodebt,legislationcanaffecttiming)• taxconsultantsignscontractwithclienttoprovidetaxadviceforfixedfee• performswork• issuesbill• billduebutnotyetpaidbyclient(stilltimetoaskformoney)• clientpays(rightarrivebeforepay)
o Underaccrualsbasis:(unclearwhentherightarises)o incomeisrealisedwhen“feeshavematuredintorecoverabledebts”:Henderson(ifcanrecover)o Mayneedtoaccountfor“workinprogress”(workdonebutnotyetbuilt)
Ballarat Fact:
o taxpayer:abrewero soldproductswithdiscountforpromptpayments(onlydiscountedamount,notfullamount)o discountalmostneverrefusedo reportedincomenetofexpecteddiscounto Commissioner:triedtotaxgrossprice(fullamount,onaccrualbasis,claimanddeduction)
Held:fortaxpayer(Discountedamount)
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o Reasons:o company’s figure represented “what the companywill, in the light of all past experience and
policy,almostcertainlyreceive…”(wiredtoreceivegross)o Commissioner’s figure: “almost certainly”will not be received in fullàmisleading figure (not
true/clearreflection)o “uncertaintyofeventualreceipt”:maynotaffectrecognitioniftheuncertaintyisveryremote(if
goodguessàgoodbasisforthatfigure)o Consistentwithaccountingrules?o ATOpositionafterBallarat:TR96/20o Generalrule:stillrecognise“fullinvoiceprice”o onlyexception:(unless,onlyinthistimediscountedamount,otherwisefull)
• iffactsare“onallfourswith”Ballarat• i.e.“theremustbevirtualcertainty…thattheamountofdiscountwillnotbereceived”
BHP Bil l iton Petroleum Fact:
o taxpayer:soldpetrolproductso newresourcestaxwasleviedontaxpayero tried topasson the tax tobuyers, and issued invoices accordingly (passonbuyers topay tax
amount)o buyersrefused,resultinginprotractedlitigationo Commissioner:triedtotaxthepassonamount(tothebuyer)o Taxpayer:arguedthatincomenot“derived”untildisputesettledo (Questiononcertaintyuntildecided)
Held:fortaxpayer
o Reasons:o recoveryofthepassonamountuncertainandoutsidecontroloftaxpayero derivationshouldbedeferreduntildisputesettledo avoidproblemsofre-openingassessmentsandunfairnesstotaxpayero Eventualreceiptshouldbesufficientlycertain(consistentwithBallarat)o Consistentwithaccountingrules?
Arthur Murray o Fact:o taxpayer:provideddancelessons(selllessonsfor10months,payinfront)o receivedlumpsumfeesinadvanceo contract:stated“norefund”,butinpracticesometimesrefundo only reported fees attributable to lessons already taught (suspense accountàtransfer
suspenseàendaccount,onlyuseaftertransferred)o Commissioner:triedtotaxwholeamountupfront(endaccount)
Held:fortaxpayer
o Reasons:o decision should base on “general understanding among practical business people of what
constitutesaderivationofincome”o receipt“subjecttocontingency”ofpossiblerefund:“received”butnot“earned”
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o Income can be “received” but not yet “derived” (beneficial entitlement, only for service, notperformed services yet, not entitle suspending fees, no rights, not really aboutrefundàperformedornot—nobeneficialaccount)
o Consistentwithaccountingrules?
Summary—general rules o righttoclaimpayment,&o eventualreceiptshouldbesufficientlycertain
“Incurred” Recognition of Deduction o “incurred”:s.8-1ITAA1997
• caselaw§ definiteliabilitytopay:NewZealandFlaxInvestment(case),TR97/7
OccurtopayIncurrent,notpayableobligationtopay,cannotgetout
RequireliabilitytopayJames Flood o Fact:o taxpayer:companywhichaccruesannualleaveforemployeeso Leaveentitlementmightbelostifemployeedies,employmentterminatedduetohisownfault,
etc.o taxpayertriedtoclaimdeductionfortheaccruedleave(setupprovision,deductprovision)
Held:not“incurred”
o Reasons:o entitlementsubjecttocontingencieso nodefiniteliabilitytopayo (noobligationuntilactuallytake leave,expectedpending,notyet incurred, terminationclause
evenwithoutànotincurred)o Consistentwithaccountingrules?
Accrued Leave o PrincipleinJamesFlood:
• reaffirmedinNilsenDevelopmentLaboratories:“incurred”onlywhen“theemployeeentersuponaperiodofleave”(couldterminate)
o To remove further doubt, tax law changed in 1978 (before the High Court handed down thedecisiononNilsen):• nodeductionofleavepaymentsuntilpaid:s.26-10ITAA1997(noliabilitytopayuntilleave
taken,specificdeductiondenialpromiser)
RACV Insurance o Question: Can “estimated liability” ever be “incurred”? (amount have to be sufficiently
certainàhavetoknowtheamount)Fact:
o taxpayer:insurancecompany(estimated,estimatedliabilitydeduction)
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o claimed deduction for “unreported claims” (constitute huge amountà predictable based onhistory)
o amountprovedtobeconservative,muchlowerthantheactualamounto expertwitness:matchingprinciplevery important in insurancebusiness (under legislation,not
knowamount)o Question:Can“estimatedliability”everbe“incurred”?
Held:fortaxpayer(notapplicableoutsideinsurance,unlesssimilarlegislation)
Reasons:o specialcircumstancesforinsuranceindustryo taxpayer’saccount:atruereflexofitsincomeo Estimatedliability:ifalmostcertain,maybe“incurred”(ifwithout—nottruereflection,special
conditionofinsurances,legislationofinsurance)o Consistent with accounting rules? (claim constructive deductionßcertainly not less than that
amount)
Austral ian Guarantee Corp . o Issue:Mismatchbetween“incurred”and“payment”
Fact:o Taxpayerissueddebentureso obligationtopayinterest:deferreduntilredemption(upto20yearslater)o soughttodeductaccruedinterest
Decision:fortaxpayer:
o Reasons:• presentliabilitytopayà“incurred”(notmatterdeferred,cannotavoid)
o Asymmetrictreatmentbetweenpayerandpayeesàtaxavoidance• NowsubjecttoTOFA:effective1/7/2009(largetaxpayer,matchincomeanddeduction)
§ Accrueinterestoverperiodoncompoundinterestbasis§ Symmetric treatment for payer and payee (in order to deduct but not occur in the
future)
Coles Myer Finance Fact:
o financecompanyissuedashort-termbillatadiscounto termofbillover2yearso taxpayer:arguedforimmediatededuction(basedonAGC)o Commissioner:arguedfordeductiononlyuponredemption
Held:pro-ratadeductionoverterm
o Reasons:(matchingprinciple)o discountà“presentobligationtopay”à“incurred”o BUT,newconcept: “there remains thequestion:howmuchof that…outgoing is referable to
theyearofincome?”(referable—period)o Consistentwithaccountingrules?(caseuseonlyforfinancialinstruments)
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Cityl ink Melbourne Concessionfee:dischargeliability,claimownliability
Presentliabilitytopayupfront
o FederalCourt:• (1)“incurred”&“referrable”
§ “Such an outcomemight be seen to be something thatmight only be expected in ataxpayers’ heaven” (referrable to each income yearànot need to pay until 2034)(massdeduction,notneedtopayuntil.
• (2)“shareofprofits”orcapitalexpenditureo FullFederalCourt:
• (1)butnot(2)o HighCourt:ditto—sameasFFC
Summary—general rules o presentobligationtopay(tobeincurred)o amountsufficientlycertaino referable(caution—onlyforfinancialinstruments)
Prepayments o Taxavoidance:(massivelargeamountupfrontàuptoeachyearamount)
• usedtobedeductibleuponpayments:FCTvLau(1984)6FCR202o 1988:SubdivisionHDivision3PartIIIITAA1936:(82KZMsectionàpreventsprepaymentànot
denydeductionàbringtoyearreferableàappropriationoverdaysbasis)• ingeneral,spreadoverserviceperiod (maximum10years)(appropriationdeductionover
10years)• Exceptionsinclude:
§ <$1,000§ Prepaymentofsalary/wages§ ForSBEornon-businessexpenditureofindividuals:
ü Serviceperiodnot>12monthsANDendswithinnextincomeyear
Trading stock Trading stock
Definition:o inclusive: “anything produced, manufactured or acquired that is held for purposes of
manufacture,saleorexchangeintheordinarycourseofbusiness”,andlivestock:s.70-10ITAA1997 (on shelf, anything turnover, anything sales) (codified provision, when amount incurredandderived)
o widescope:including• land:KurtDevelopment,StHubert’sIsland• shares:Investment&MerchantFinanceCorp,PatcorpInvestment
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Tax Accounting Rules o similartoaccountingrules:o expenditure incurred on t.s. “on hand”à deductible: s.70-15 ITAA 1997 (when deductible
specify)(s.8-1)(deduction:8-1,sellsordinaryincome6-5,timing:s.70)(increaseinflateprices)• subjecttoarm’slengthadjustment:s.70-20(aresponsetoCecilBros)(righttodispose)
o nevercapitalexpenditure:s.70-25((1)deductibleunder8-1,capital—denydeduction,notfail8-1;(2)revenue,notcapital6-5)
o Compareopeningandclosingstock“onhand”:s.70-35 (atbeginningandendoftheyear—notgetawholemassivestocktoclaimdeductionàtruereflectionoftrueincome)• ifclosing>opening:assessableincome• Ifopening>closing:deduction
o disposaloft.s.àA.I.:s.70-80(1)(assesstiming)(sell)
Trading stocks “On Hand” o Generalrule:
• dispositivepowerà“onhand”:Farnwortho Exception:
• landastradingstock§ “onhand”untilsettlement:Gasparin
Valuation of Closing Stock o Can choose between 3 methods for each item for each year: s.70-45 ITAA 1997: (can do
comparison,canchoosewhichevermethodforeachyear,chooseitembasis,orothers)• Cost• marketsellingprice• replacementvalue
o Mayvaluelowerforobsoletestock:s.70-50(additionalvaluationrule)
Non-arm’s length acquisition o Ifcostoft.s.>m.v.innon-arm’slengthtransaction:s.70-20ITAA1997
• Costdeemedtobem.v.(nottheinflatedprice)• Symmetricadjustmentforseller
Disposal outside Ordinary Course of Business o e.g.gift, saleofbusiness,distributionof t.s.upon liquidation (e.g.StHubert’s Island) (dispose,
notordinarywayofmarketvalue)• m.v.deemedasA.I.:s.70-90ITAA1997(MV)
§ IT2659&annualTDsforvaluesoft.s.forprivateuse• symmetrictreatmentforacquirer:s.70-95
o similarrulesfordeathofowner:s.70-105• Rollover: can be elected if continue to be held as t.s. in continuing business after death
(Partnershipgetwhatevercalculatedatthattimeàcontinuevaluationprocess)o (avoidstocktake—havetodo)
Trading Stock ßàNon-Trading Stock o non-t.s.àt.s.:s.70-30ITAA1997
• Deemedcostoft.s.=actualcostorm.v.• if elect form.v., may result in capital gain/loss: CGT Event K4: s.104-220 (market value,
ratherthanactualvalue)
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• ifactualcost=0,maysubstitutewithm.v.atacquisitiontime:s.70-30(4)item1(privateinnature)
o t.s.ànon-t.s.:• deemeddisposalatcost:s.70-110 (adifferentoutcomefromSharkeyvWernher)(closing
storeàownuse,includecostamountintoAI)
Trading Stock for SBE o Concession:Subdivision328-EITAA1997(complysavingreasons)o Donotneedtoaccountforchangeinvaluesoft.s.if:
• differencebetweenopeningstockand“thevalueyoureasonablyestimate”ofclosingstock≤$5,000
o Effect:• avoid stocktake (inventory computer system,<=5000,useopen stock, andcarry fornext
period,openofthenextyear=close,open=close)• valueofclosingstock=valueofopeningstock
o Canchoosenottoadopt“concession”:s.328-285ITAA1997(hastodostocktake)
W11—Tax Avoidance 1. Generalanti-avoidanceprovision2. Internationaltaxavoidance–Apple
Revision + Feedback o TheCardenistheclassiccaseonthechoicebetweencashandaccrualbasis,whichisaquestion
of fact. The case establishes the principle that the tax accounting basis must provide asubstantiallycorrectreflectionofthetaxpayer’strueincome.
o Thekeywordfortaxaccountingwithrespecttoordinary income isderived. Foraccrualbasistaxpayers, it depends on two factors: (1)whether it is been earned and (2) right to claim(beneficialownership/interest).
o Commonexamplesofcashbasisare(1)SBE;(2)Professional/individualand(3)employees.o Theconstructivereceiptruledeemsreceiptofanamountiftheamountisappliedordealtwith
onbehalfofthetaxpayerorasthetaxpayerdirects.o Foraccrualbasistaxpayers,thekeywordfortaxaccountinginrespectofexpensesis incurred,
which has 3 factors: (1) present obligation to pay; (2) amount sufficiently certain; and (3)referable.
o Provisionsforannualleavearenotdeductibleunders.26-10ITAA1997.(untilpaid)o Garycarriesonasecond-handcarbusinessandgivesaBMW(cost$50,000andm.v.$40,000)
fromhistradingstocktohisdaughterMaryasherbirthdaypresent.Garyhastoreport$40,000ashisassessable incomeinhistaxreturn. ThecostofthecartoMary is$40,000. (disposaloftradingstock,disposalprice=MV)
o Sameasabove,exceptthatGarytakestheBMWfromhistradingstockanduses itashisowncar. He has to report $50,000 as his assessable income in his tax return. (Costàstop to betradingstock,stillownthatstock)
Tax Avoidance o Whatistaxavoidance?o “some act by which a person so arranges his affairs that he is liable to pay less tax …” [the
RadcliffCommittee,UK,1955](diminishingdepreciation)o “everyattemptbylegalmeanstoreducetaxliability…”[theCarterCommission,Canada,1966]
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o Aspectrum:NotaxplanningàAcceptabletaxplanning(accordingtolaw,butitisnotalongthespirtoftheACTobjectandintention;2depreciationformula,diminishingvalue,choiceintendedbylaw)àunacceptabletaxplanning(loopholesinlaw,interpretinwaynotacceptable/shouldnot)—Part IVA appliesà Tax evasion (criminal offence); (acceptable tax planning andunacceptable—morally,taxplanning:immoralratherthanillegal)
o Examples:o Domestic:
• Timing:(regime)§ Deferincomerecognition(timevalueofmoney,§ Acceleratedeductions
• Taxratearbitrage:§ Personal services income (different rates between entityàpersonal or business 30%
arbitragebetweenpeople,trust&partnership)§ Incomesplittingthroughpartnershipsandtrusts
o International: base erosion profit shifting (BEPS) (test globally, take together, not jurisdictionlosscompetitiveadvantage)(OECD:profitshifting,preventonecountryfromhurtinvestments)• Doublenon-taxation:e.g.Apple(releasetaxpayerbutnottaxinanycountry)• Avoided PE structure: e.g. Google (PE: permanent establishment in AUS, shop/office
locationwhereforeigneroperateinAUS,anythingnotgointoPE,nottaxed,everythinggointoPE,taxed)(provisionofpublicgoods)
• Doubledip:e.g.§ Hybrid entities (tax regime arbitrage, limited partnershipàpartner behind, not
recognisedascompanyinAUS)§ Hybrid instruments (redeemable preference share, recognise as equity and debt;
equity: frankableànotdeductible, anddebtàinterest paydeductibleàdoubledip inoneamount)
• Transferpricing(inflateintragroup,decreaseincome,entityAmassivededuction,wrapoutincome,B:incomeshouldbeinAbutinB)
General Anti-Avoidance Provision – Part IVA o Keyconcepts:s.177D(definition:177A)(division4A,1936)(satisfyall)(3)
• “scheme”• “taxbenefit”• “relevanttaxpayer”• 8matters• “soleordominantpurpose”:s.177A(5)
o Effect:• Commissioner’s discretion to cancel (or partially cancel) tax benefit: s.177F (part 4A
determinations;identify—nolongerget)177DSCHEMESTOWHICHPARTAPPLIES(operativeprovision)
o (1)ThisPartapplies toascheme if itwouldbeconcluded (having regard to the [8]matters insubsection(2))thattheperson…whoenteredintoorcarriedouttheschemeoranypartoftheschemedidsoforthepurposeof:(notneedtobethesameperson,nothavetobearelevanttaxpayer;bankàclients,bankstrategiestoattractmorecustomer)
o (a)enablingthe“relevanttaxpayer”toobtainataxbenefitinconnectionwiththescheme;or
o (b)enablingthe“relevant taxpayer”andanother taxpayer (or taxpayers)eachtoobtainataxbenefitinconnectionwiththescheme;
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o (4)PartIVAonlyappliestotheschemeif:(a)schemewasenteredintoafter27May1981;or(b)Schemehasbeenoriscarriedoutorcommencedtobecarriedoutafterthatday…
o (5)AppliestoschemesenteredintoorcarriedoutinAustraliaoroutsideAustraliaorpartlyin&outofAustralia.(in—4A,out,orpartinandpartout,usedtobewhollydomestic,doubledipping(equity)àavoidofNILtaxnotAUSàcrossbroader)
Scheme o Definition:s.177A(1)(broaddefinition,trytocaptureeverykind)(***identifyactualscheme)
(a)anyagreement,arrangement,understanding,promiseorundertaking,whetherexpressorimpliedandwhetherornotenforceable…;and(b)Anyscheme,plan,proposal,action,courseofactionorcourseofconduct.
o Veryimportantconcept:affect“dominantpurpose”• Widervsnarrowerschemes:e.g.steps1to10àoneschemeandseveralschemes?(inone
transaction (deduction) ***schemeàmay just be step 9, or 6-9, or whole, but clearlyidentify which part of step/ deduction obtain tax benefitàdominant purpose for taxbenefit)
• Which version would ATO prefer? (part 4A successful, if include commercial reasonstepsà4Afails)
Tax Benefit o Definitionins.177CITAA1936,including:(executivelist)(mustbeone)
• Non-inclusionofA.I.(ifnotcarrystep9,willnotincludelossasassessableincome)• Additionaldeduction(extradeductionwouldnotcarryoutifnotcarryoutscheme)• Capitalloss• Foreignincometaxoffset(taxresident)(getadditionalforeignincometaxoffsetbystep9)• Avoidwithholdingtax(WHTdividend,interestroyaltypaidoffshoreàchasethepersonto
get pay tax or notàwithhold before offshore, bank must withhold before payàin step9ànotneedtopaywithholdingtax,meetWHT)
o Forschemesentered intoonorafter16Nov2012, thetaxbenefitmustbedeterminedbasedon:(amendment4Aamended,relivedoubletax)• eventsorcircumstancesthatactuallyhappenedorexisted(otherthanthosethatarepartof
thescheme);• Areasonablealternativepostulate,havingregardtothesubstanceandresult/consequence
ofthescheme.
8 Matters o Listed in s.177D(2) ITAA 1936 (dominate purpose of tax avoidance) (4.5.6 relevant taxpayer,
directorpenalty,whogetwhat,whatgotschemebetweenlinkagesofentitiesinvolved)o Need to consider all, but not necessary to refer to in a judgment (all 8 or first 3. Require all
8àtakeallintoaccount)• A“globalassessmentofpurpose”isacceptable:ConsolidatedPress
o (i)themanner inwhich the schemewas entered into…; (compare legal form vs substanceàsubstance of scheme = legal form, A—liabilityàB, legally give rise to liability; liability of Asecured by Bànot really a liabilityànot actually needs to payàliability raise because needliabilitytoAI,butlegalliability)
o (ii)theformandsubstanceofthescheme;
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o (iii)thetimeatwhichtheschemewasentered intoandthe lengthof theperiodduringwhichtheschemewascarriedout;(massivedeductionbeforeyearend—indicatetaxavoidance)
o (iv)theresultinrelationtotheoperationofthisActthat…wouldbeachievedbythescheme;o (v)anychangeinthefinancialpositionoftherelevanttaxpayer…;o (vi)anychangeinthefinancialpositionofanypersonwhohas…anyconnection(whetherofa
business,familyorothernature)withtherelevanttaxpayer…;o (vii)any other consequence for the relevant taxpayer, or for any person referred to in
subparagraph(vi)…;ando (viii)thenatureofanyconnection…betweentherelevanttaxpayerandanypersonreferredto
insubparagraph(vi)(FS: includeall steps rather thanonlystep9 (scheme),arguewhatwould transaction if step9not happen, include actually happen, sufficient to argue do nothing scenario, alternativehypothesisisreasonableàconsequenceofscheme,caseRCIàcouldhavedonenothingsufficialargueagainstcommissioner,court:unreasonable—RCIwon)
Dominate Purpose (of tax avoidance TA) o Means “the ruling, prevailing or most influential” purpose: Spotless (***TO identify scheme
properly)o Can co-exist with other commercial purposes: Spotless (***can have multiple purpose, TA is
morethancommercial)
High Court Cases o PartIVA:enactedin1981o Peabody(1994)o Spotless(1996)o ConsolidatedPress(2001)o Hart(2004)
Peabody (1994) o 1stHighCourtcaseonPartIVA
Fact:o majorshareholderinprivatecompanywantedtofloatcompanyo purchasedallsharesfromminorityshareholder(atbelowlistingprice)(keeppriceconfidencial)o madethesharesworthless,thenfloatedcompany(transactionvalueout(dividend))o Issue:canCommissionerisolatevalueshiftingstepasthe“scheme”?
Held:yes (reverseddecisionofFullFederalCourt,which reverseddecisionat first instance, thoughthetaxpayerwonthecaseduetoothertechnicalissues)
Reasons:o “aschemedoesnotincludepartofascheme…[whichis]notaschemeitself. Thatwilloccur
where the circumstances are incapableof standingon theirown…That, of course, doesnotmean that if part of scheme may be identified as a scheme in itself the Commissioner isprecludedfromrelyinguponitaswellasthewiderscheme”.(schemestandbyitself,ifthisstep9, can stand by itself (scheme)ànarrower schemeor notworkà broader scheme, cannot beisolated,notachieveanythingorthewholetransaction)
Spotless (1996) o 2ndHCcaseonPartIVA
Fact:
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o companyconsideredvariousinvestmentoptionsforits$40Msurpluscasho decidedtodepositinaCookIslandsBank,thoughitsratewas4%lowerthaninAustraliao interestsubjecttoaloww/htax(aftertaxreturnishigher,taxpayissolow,chosetoinvestin
CookislandpurelybecauseTA,excludeamountfromAI)o suchinterestasaresultexemptfromAustraliantax(perprevailinglaw)o after-taxreturnwasthushighero Issue:PartIVAapplies?
Held:yes(reversedtheFullFederalCourt’sdecisionthatthedominantpurposeoftheschemewastoobtainthehigherafter-taxinterest,asoundcommercialgoal)
Reasons:o In this case, the “elaborate nature of the scheme and its attendant circumstances lead
inevitably to theconclusion that theschemewasnotmerely taxdrivenbut that itsdominantpurposewastoenablethetaxpayertoobtainataxbenefit…”(notincludeinterestinAUS,inAI,exemptionclaimbyCookisland)(today—notsure—Part4Afaileddown)
Consol idated Press (2001) Fact:(redeemablepreferenceshare)
o CPHintendedtotakeoveraUKcompanyo arrangedfinanceinaparticularway:
• (1)borrowed$450Mfrombank(raisingfinancecirclesubstance—nomoneygoinganyway)• (2)subscribedredeemablepreferencesharesinMLG(Aus)• (3)MLGsubscribedsharesinCPIL(UK)• (4)CPILlentthe$450MtoaSingaporegroupcompanyfortheproposedtakeover.
o claimeddeductiononinterestonthe$450Mloano Commissioner:arguedstep(2)wastookjustfortaxpurpose
Held:PartIVAapplied
Reasons:o scheme: “the Commissioner identified, as the relevant scheme,part only of the total plan …
involvedinthecorporatearrangements…thisisopentotheCommissioner”o purpose:“attributingthepurposeofaprofessionaladvisorto…thecorporateparties…isboth
possibleandappropriate”(purposeofadvisorvspeoplecarryout)o 8matters:“itwasnotnecessaryforthejudgetorefertothemattersindividually”(takeadvice,
notactuallydoforyou—cangloballookat)
Hart (2004)*** (demonstrate part 4A) o ThefourthHCcaseonPartIVA
Fact: (negative gearingàD40/43 (1) Depreciate give deductionàgive to investment propertyand (2)mortgage interest pay on loan is deductible on investment propertiesàas assessableincome(rent),interestnotdeductibleonhome)
o taxpayerandhiswifepurchasedhouseasnewhome,andkeptoriginalhomeasinvestmento borrowed$298,000undersplit loanarrangement (onebig loanforbothproperty,principalgo
down all went to home, not match interest on home (capitalized), principal of investmentincreaseàinterestoncapitalizedincreasingàincreasinginterestdeduction)
o repaymentsallallocatedto“homeloanaccount”tilfullrepaymento interestaccruedon“investmentloanaccount”capitalizedandcompounded(keepgrowing)o Commissioner:disallowed“additionalinterest”(onlyherebecausenotthere)
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Held: Part IVA applied (first instance: yes; Full Federal Court: no) (tax benefit—sole reason intoscheme—wastoreachinterestdeductionànoothercommercialpurpose)
o Reasons:o scheme:“Itencompassesnotonlyaseriesof(permanent)steps…butalso(byitsreferenceto
“action”inthesingular)thetakingofbutonestep”(shiftingtooneside)o Accepted both a “wider” (viz. the whole loan process) and a “narrower” scheme (viz. the
splitting of loan and allocation of repayments to the home loan account) identified by theCommissioner.
o “The “wealth optimizer structure” depended entirely for its efficacy upon tax benefitsgenerated by arrangements… that had no explanationother than their fiscal consequences”(adjustamount,otherthanextrataxdeductionbybankàbut it is thecoupleneedtopaytax)(bankprovidethestructure)
iTax: o HowdidApple shelterUS$44 billion from taxation anywhere in theworld between 2009 and
2012?o Reference: Ting, “iTax: Apple’s international tax structure and the double non-taxation issue”
(2014)BritishTaxReviewNo.1pp.40-71o http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411297
notpaytaxinanymarketUSentity—checkbox
Ireland—centralmanagementcontrol(inUS)Simple tax structure, notenter anything—not residentof any country, complementUSandIrelandtaxregimesShare economic benefit oflegalIP
Creation of double non-taxation o DefinitionsofcorporateresidenceinIrelandandtheUS
• Perfectcomplement§ RecentchangetodefinitionofcorporateresidenceinIreland:asmallwininthewaron
BEPSo Transferpricingrulesonintangibles
• Cost sharing agreement: information asymmetry (IP cost) (dis-appropriational, cost andincomenotmatch)
o USCFCregime• “relaxed”manufacturingexceptions
o UScheck-the-boxregime(disableCFC,disagreeintrasales)• EffectivelydisablesUSControlledForeignCorporationregimeforintra-groupsales,etc.
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The tale of the check-the-box regime o 1997:
• TheregimewasintroducedthroughTreasuryregulationso 1998:
• USTreasuryandIRSrecognisedthemistake§ TheCFCregimeiseffectivelydisabledtoalargeextent
• IssuedNotice98-11andcorrespondingproposedregulationstoclosetheloophole§ Thesedocuments“provokedcontroversyamongtaxpayersandmembersofCongress”:
“firestorm”• Thedocumentswerepromptlywithdrawn:
§ Remindedofascenein“InsideJob”(theOscar-winningdocumentary)
US attitude towards BEPS o TestimonyofaprominentUStaxlawyerbeforeaUScongressionalhearing(emphasisadded):o Why should we – rather than the UK tax authorities – worry if [US MNEs] are employing
strategiestominimizetheirUKtaxes?…Ultimately, inconsideringtheappropriatereactionto[BEPS]whose primary impact is foreign taxminimization,wemust consider carefullywhethertheUnitedStateshasaninterestinimposingandenforcingruleswhoseprimarybeneficiariesareforeign fiscs, rather than the US treasury. (defensive, anti, MNE—provide job, and economicconsideration)(whetheritisthebestinterestintermsofeconomy)
MAAL: s177DA Schemes that limits a taxable presence in Australia (apply to global level) o MultinationalAnti-AvoidanceLaw
• Appliesfrom1January2016• Appliestosignificantglobalentities
§ >$1bnannualglobalincome§ Accountinggroupmemberofsuchentity
o Applieswhere:• ForeignentitymakessuppliestoAustraliancustomers• anassociateAustralianentityundertakesactivitiesdirectlyrelatingtothatsupply• ForeignentityavoidsataxpresenceinAustraliainordertoobtainanAustralianandforeign
taxbenefit.(useentitynotconstitutePE,avoiddoubletax,noPEinAUS,nottax)o Outcome:
• Commissionermaycancelanytaxbenefits• Uptodoublethemaximumadministrativepenaltiesmayapply
W12—Review GST—Overview
Retailer/taxpayercarryonenterprise,buystuffandsellstuff,chargeCGTonsell,turnoveràregisteredforCGT
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o ITC $2 receivable from ATO; GST $7 payable to ATO. ($2 for CGT to provide taxable suppliesàget$2fromtaxoffice,charge$70forservices,$7forCGT)
o OnBAS,netoff:$5payabletoATO.o Therefore,costofshampooforHairdresseris$20o If the taxpayer is registered for GST (broadly annual turnover > $75,000), and carries on an
enterprise,then:(applicableornot)(notincomeifsentfortaxofficeàifnotregistered,GSTnotaffect,ifregisteredforCGT,claimcreditbackànot$7,just$70àbringintoAI,andifneedtodepreciate,cost,inputcreditback,ifregisteredcost=$20,ifnotregisteredcost=$22àintermsofincomeanddeductions)• excludeGSTcomponentfromincome:s.17-5ITAA1997• reducefollowingamountsbyITC:
§ Lossoroutgoings:27-5§ Costoradjustablevalueofdepreciatingasset:27-80§ Terminatingvalue,ifthebalancingadjustmenteventisataxablesupply27-90
o GSTcollectedbythetaxpayerisnotincomeoftheTaxpayer.o ThereisnodeductionforanamountspentbythetaxpayerifthetaxpayerreceivesanITC.o Notrelevantforemployeetaxpayers
Income and residency o Assessableincomemadeupof2types:
• Ordinaryincome(s6-5)andstatutoryincomeo Broadly3categoriesofincome(3categoriesàOIornot,morelikely)
• Personalexertion(salary,commission(services))• Property(rent,interest,royalty(IP),dividends)• Business(case)
Deductions***** o Bemethodical:(easytobemethodical)
• Generaldeduction8-1:guidancetotellhowtoanswer,checkthe list, followthemethod,start with general deduction, if a specially ask what depreciation deductionàadvise) (ifgeneraldeductionà8-1,checklistandcasesàlinktoeverywordsin8-1)(“thisexpenseisdeductible because it is linked to positive limbs” X—need subject to negative limbs) (2sides)
• Specificdeduction:§ Div 25 (notmean cannot deduct under 8-1àif deductible under bothàwhichmost
appropriateàthebiggerdeduction)§ Depreciation (2 methods, cost of assets element and 2 both formulated method.
Holderusefortaxablepurposeàappropriationordispose)§ Trading Stock (70—actually OI—timing regime, comparison between operating and
closing=specialdeduction,3parts:revenue/deductionàwhen/comparingbetweenopeningandclosing)
o CGT(à income;notdeduction forcapital loss) (includeamount inCB ifnotgetdeductionforamount incurred)(question: can include in CBànot use CB to calculate capital loss) (dentilprovision:equivalentinCGTregime)• Costbase/reducedcostbaseinclusion
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o Blackholeexpenditure:40-880 (capital costproposed to carryon,notdeductible for capital innatureàdeductunder40-880:5years,nodayappropriation,cost/5)
o Deductiondenialprovisions(26-5,26-10etc)(penalties,statelaw,notincludepersontoperson;26-10annualleavepaymentsàdenyuntilcontingencyhappen
o Ask:isanycaselawrelevant??
General Deductions 8-1 o Elements:(checklist)
• Lossoroutgoing• Incurred in (presentobligation,obligationtopay,existing topay,notabout timingtopay
(whentopay)(insuranceandtelephonebill:insurance—optional,bill—useservice—abilitytosue)
• gaining assessable income/carrying on business to gain assessable income (incomeproducingactivitiesànotactuallyhavetoproduceincome)
• Notcapital(capital:SunNewspaper)§ Caselaw
• Notprivateordomestic§ Typically private: food: Cooper—not deduction, clothing: Edwards (secretary of
governor—over and above, condition towork,Qantas harsh condition, directly fromwork),travelfrom/tohome(L&H,notlinkingtoworkandprivateinnature)etc)
• NotforgainingexemptorNANEincome(Dividendoffshore)• No specific deduction denial provision applies (deduct denial provisionàD26, enter 32,
exceptioninDiv32àcanceldenialàmake8-1deductible)§ penalties, leave payments (deny until contingency), payments to related entities,
bribes,recreationalclubs);entertainment;self-educationexpenses§ Note: these provisions may deny the deduction outright or deny a portion of the
deduction
Specific Deductions o Div25o Travelbetweenworkplaceso Protectiveclothingo Repairs (25-10 maintenance case: improvement, replacement, initial repairàcapital
expenditure,partofpurchase,case:WesternSuburbCinemaRoof—nohypotheticaldeduction)o Capitalworks (building4%or2.5%,4 forhighwearandtire—industrialappropriationondaily
basisonconstructionexpense)o Depreciation (decline in value Div 40,work through 25) (use or not, not change depreciation
deduction,whendepreciationfortaxablepurpose)(appropriationàBAEcompare)(balanceoutdepreciationclaimed,downtowrittendownvalue)(dispose>writtendownvalueàdepreciatetoomuch40-285,terminatingvalue>adjustablevalue)
Depreciation o Primecost
• Costxdaysheld/365x100%/EL(daysheld:inincomeyear,notoverthewholelife,hastobe<365)
o DiminishingValue• BaseValuexdaysheld/365x200%/EL(basevalueàchangeeveryyear,largeupfront)
o BalancingAdjustment:40-285
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• CompareTerminatingvaluewithopeningadjustablevalue• IfTVexceedsAV,excessisAI• IfTVislessthanAV,differenceisdeductible
Trading Stock o 3thingstoremember:(s70—whentaxreturn)
• Sales=ordinaryincomeunder6-5• Purchasers=generaldeductionunder8-1• Year-endadjustment:compareopeningandclosingstock(closingincrease,differenceàAI)
CGT o IdentifyCGTevent(Theeventmustbethefirsttoidentify,disposeofshares,notC2,G1àA1—
anykindofpropertyorlegalright)(D1:createrighttootherpeople,restrictivecovenantàpaytomakepromiseàotherscanuseyou)(H:residual,Fsàleases) (specificsection104-5notusethesection,usethetable,notoperative,actualgotoA1……)• Commonevents:CGTeventA1,C2,D1,H2&Fs
o CGT asset (check CGT asset, collectable cost < $500, ignore, personal use asset: $10,000,exempt,disregardslosses)• Collectables,personaluseassets
o Exemptions• Pre-CGTassets(pre-CGTasset1985)• Cars• mainresidence:rulestoextendit;rulestolimitit;spouses(118-Bmainresidency)
o CapitalProceeds(CP:116whateverreceivefromsellingasset)o Costbase/reducedcostbase(CBàRCB5elements,element3,donotindexRCB)
• Noinclusionifcanbededucted(ifdeductedànotincludeinCB,notdeducttoextent110-45)
o Capitalgain/loss(loss—RCB,gainifmorethanCB,lossiflessthanRCB,middle:nothing)o Netcapitalgain/loss–methodstatementin102-5(howtocalculate,box,NCGgotoAI,SIfigure)o Discount capital gain (not D1: list out discountable, cannot discount D1—at least 12 month
ownership,D1rightcreatedtodayàmaximisediscount%)o SmallbusinessCGTconcessions:(328-110àturnover,maxnetasset)
• smallbusinessentity;maxnetassetvaluetest;(basiccondition:oneofthoseSBE/MAXNA)• Activeassettest(useassetforatleasthalfofownershipperiod)• 15yr exemption; 50% reduction, retirement exemption; CGT asset rollover (15 yr choice
firstàentirely disregarded CG, 50% reductionàavailable for company; discount ànotavailableforcompany)(retirementexemptionà50000)
• Basicconditions;additionalconditions
Tax Accounting o Abouttimingo Cash(employeelike,soletrader)o Accruals(bigger,tradingstocks)o Income-Derivationo Deductions–Incurred(lossofoutgoingincurred)
Final o Canusesentences,dotpoints,nottoobried
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o CGT*****,SBE*****o Mainresidency*****,exemption,knowwell,changemainresidencyrule*****o Calculatedepreciation,calculateBAo Deductiondenialo SDprovisiono Caselawà8-1deductiondenial
Midterm Feedback o 1.Havepermanentvisaàtemporaryvisanotrelevanto Test:residencytestàresident,applywheneverytimechangeofintentiono TiesàAUS,3monthmembershipknowmanygobackànotholdmuchweight,not=intentionto
notstayinAUSàstillintegraltoAUSàstillresidento Breakupàcompletechangeofintention,fromthatpointànoneresidento 183à fullyearàtestapply,atendofyear,“havebeen inAUSforhalfofyearàusualplaceof
abode,atendofyearàbecausealltiesarebrokenànotresidentforrestof24days, intendtotakeresidencyofAUSàno)
o focusonwholesituation,nottoofocusononespecifico share:noneresident,CGTI1deemsdisposalo 2. (b) wages and tips: wage: 6-5, tips—ordinary income, personal exertion, why income:
questionisaboutinwhatcapacityshereceivedthatmoneyàaswaitress,notbefriendly.o Horse:cases,winningsnot, ifnotOI—gotoCGTexemption180,excludeintoCGT,dividends—
notshares itself,OI&SI44,6-5 fromproperty,SI—prevail,anti-overlap rule, loss—capitalA1,notG1—returnfromshares)