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All legislation refers to ITAA97 unless otherwise statedITAA36 = “36”

LWB364 INTRODUCTION TO TAX LAW – ANSWER PLAN

Contents

STARTING A QUESTION…............................................................................................................................2What is [taxpayer’s] income tax payable?................................................................................................2What is [taxpayer’s] taxable income?.......................................................................................................2What is [taxpayer’s] assessable income?.................................................................................................2

RESIDENCY – [SKIP IF RESIDENCY ISN’T AN ISSUE]................................................................................3Is [taxpayer] an Australian resident?........................................................................................................3

ORDINARY INCOME......................................................................................................................................5Which of the receipts are ordinary income?.............................................................................................5

BUSINESS INCOME.......................................................................................................................................7Are any receipts business income?..........................................................................................................7

STATUTORY INCOME....................................................................................................................................9Are any receipts statutory income?..........................................................................................................9CONFLICT RULES...................................................................................................................................9

TRADING STOCK.........................................................................................................................................10Is [product] trading stock?......................................................................................................................10

SOURCE.......................................................................................................................................................11Where was the income sourced?...........................................................................................................11

DERIVATION OF INCOME...........................................................................................................................12When was the income derived?.............................................................................................................12

GENERAL DEDUCTIONS.............................................................................................................................13Are there any general deductions?.........................................................................................................13

BUSINESS DEDUCTIONS............................................................................................................................14Are there any business deductions?......................................................................................................14

SPECIFIC DEDUCTIONS.............................................................................................................................16Are there any specific deductions?.........................................................................................................16SUBSTANTIATION RULES (DIV 900):..................................................................................................19CONFLICT RULES.................................................................................................................................19

CGT...............................................................................................................................................................21CGT Questions.......................................................................................................................................21Example CGT Question – A1 Event.......................................................................................................23CGT – Effect of Death............................................................................................................................24CGT – Main Residence Exception.........................................................................................................25

GST...............................................................................................................................................................29Taxable Supplies:...................................................................................................................................29Creditable Acquisitions and Input Tax Credits (ITC):.............................................................................30


STARTING A QUESTION…

What is [taxpayer’s] income tax payable? Income tax payable is taxable income times the marginal tax rate less tax offsets (s 4-10).

What is [taxpayer’s] taxable income? Taxable income is assessable income less deductions (s 4-10; 4-15).

What is [taxpayer’s] assessable income? Assessable income is ordinary income and statutory income, and is not exempt income

and not non-assessable, non-exempt income (s 6-1; 6-5; 6-10).

[If residency isn’t an issue] As [taxpayer is an Australia resident, [his/her] taxable income includes all income sourced

in Australia and overseas.

[If residency is an issue] If [taxpayer] is an Australian resident, [his/her] taxable income includes all income

sourced in Australia and overseas. If [taxpayer] is not a resident, taxable income only includes income sourced in Australia.

… and go on to “RESIDENCY”


RESIDENCY – [SKIP IF RESIDENCY ISN’T AN ISSUE]

Is [taxpayer] an Australian resident? An Australian resident is a resident of Australia for the purposes of ITAA36 (s 995). [if relevant]: Residency is determined on a year by year basis (s 4-10) [financial year].

Residency Tests (s 6(1) ITAA36): [work through all 4 (but once have fulfilled one you are a resident)]

1. Common Law Test (s 6(1)(a) ITAA36) Here, the fact that [choose from below factors] indicates that [taxpayer] is / isn’t an Australian resident (Levene v IRC; IRC v Lysaght).

The courts have developed relevant factors:- Physical presence in Australia- Frequency, regularity and duration of visits- Maintenance of home in Australia- Family and business ties in a particular country- Present habits and way of life- Nationality

Note TR 98/17: As a general rule, someone who stays longer than 6 months in Australia intends to reside there. (Considers intention)

2. Domicile Test (s 6(1)(a)(i) ITAA36) [for someone leaving Australia - 2 elements]

To satisfy the test, [taxpayer] must:

1. Have a domicile in Australia; and2. Not have a permanent place of abode outside Australia.

Here, [taxpayer] has a domicile in Australia as … and …

- Permanent isn’t in the forever sense, just that it’s not transient (fleeting / breif) (FCT v Applegate)

- Where a taxpayer intends to stay for an indefinite period, not an Aus resident – to not have a permanent place of abode outside Aus, returning to Aus must be clearly foreseen, not just a vague possibility

- Consider (FCT v Applegate): Intention as to length of stay Actual length of stay Abandonment of abode in Aus Acquisition of abode outside Aus Intention to make abode “home” etc.

Note IT 2650: if away for more than 2 years probably has a permanent place of abode elsewhere

R NRNR R

R NR


3. 183 Day Test (s 6(1)(a)(ii) ITAA36) [for someone coming to Australia]: 3 limbs

To satisfy the test, [taxpayer]:

- Must be in Australia for more than 183 days (½ year)- UNLESS usual place of abode is outside Australia

AND taxpayer does not intend to take residence [intention test]

Here [taxpayer]…

4. Super Test (s 6(1)(a)(iii) ITAA36) unlikely to apply

CONCLUDE:

As [taxpayer] has satisfied the [test] test, [he/she] is a resident and [his/her] taxable income includes all income sourced in Australia and overseas.

As [taxpayer] has not satisfied any tests, [he/she] is not a resident, [his/her] taxable income only includes income sourced in Australia.

NR R

RESIDENCY CASES:

Levene v IRC : left London, surrendered property lease, lived there 5 months of the year, Paris for 7 months, finally settled in Monaco – where did he “reside” whilst travelling? Court looked at all the factors – case by case basis Held: resident until he took up 7 year lease in Monaco

IRC v Lysaght : Born in England, retired and moved to Ireland but performed consultancy work in England for 1 week per month, bank account in both countries and was trying to sell English property Held: UK resident

FCT v Applegate : Sydney solicitor transferred to firm in Vanuatu, gave up flat/furniture in Aus yet kept hospital/life insurance, coming back in the future but unsure when, rented in Vanuatu, stayed for 2 years, got ill so returned to Aus Held: his indefinite intention meant his place of abode was in Vanuatu, ‘permanent does not

mean forever’

FCT v Jenkins : Going to Vila for 3yrs but got sick, returned after 18mths Held: 3yrs didn’t mean his stay was temporary – failed domicile test


ORDINARY INCOME

Which of the receipts are ordinary income? Ordinary income is income according to ordinary concepts (Scott v CT (1935)).

If not clear, consider: Degree of connection to employment or services rendered Reasonable expectation that payment would be made Dependence upon payment to meet usual living expenses Payment replaces income Motive of the payer Periodic, concurrent and regular Money / money’s worth Must be characterised at the time and by whom it was received (Federal Coke; McNeil;

Constable)

Particular Categories:

Salary & Wages : [Taypayer’s] salary of [amount] is ordinary income, as it is remuneration for services rendered and is periodic, recurrent and relied upon (s 6(1) ITAA36; Dixon). Note: Must be a nexus with an earning activity

Receipts flowing from capital : The [eg. rent] of [amount] is ordinary income, as it flows from capital, the [capital item eg. property] (Eisner v Macomber; Adelaide Fruit). Rent received from lease of property (Adelaide Fruit) Shares = capital Royalties (s 6(1) ITAA36) selling copyright in something = capital; royalties from that =

income Dividends = income (s 44 ITAA36)

Compensation payments will take the same form as the payment they replace. If paying someone to replace salary = income If paying someone for loss of limb = capital Undissected lump sum = capital (McLaurin; Allsop; CSR)

Note : compensation for the loss / destruction of an asset may be capital in nature, comp for the temporary disablement of a revenue-producing asset will be income in the hands of the recipient.

Payment restricting rights : If paying someone so they will not work elsewhere = capital (Higgs v Olivier) If paying someone to eg. work only for you = income (FCT v Woite)

Illegal or immoral receipts may be ordinary income Prostitutions, drug smuggling, topless dancers = income (Lindsay v IRC – was whisky

smuggling) Note : deductions are not allowed in the furtherance of illegal activities (FCT v La Rosa,

now covered by s 26-54)


Voluntary payments : [eg. Xmas bonus; tips; player of the match awards] consider: Degree of connection to employment or services rendered Reasonable expectation that payment would be made Dependence upon payment to meet usual living expenses Payment replaces income Motive of the payer Periodical concurrent and regular Money / money’s worth

Cases: Scott v FCT (1966) : gift by client not income Moorhouse : performance award: normal occurrence in cricket that would get this –

something a cricket player should expect = income Moore v Griffiths : a bonus if England one the world cup = not income Stone : prize: things that go with being professional sports player included in income Calvin : waitress receiving money in tips = income

Other characteristics: Must be characterised at the time and by whom it was received (Federal Coke; McNeil;

Constable)

Income must be money or money’s worth – must be capable of being converted into money

The following are NOT income: Windfall gains that have no connection with earning activity (Hayes; Scott v FCT (1966))

Look at periodicity, recurrence and regularity (Dixon)

A saving in an outgoing (because income must be money or money’s worth (ss 21, 21A ITAA36; s 15-2 ITAA97):

- Free rent is not income (Tennant v Smith)- Holiday that can’t be converted to cash is not income (Cooke and Sherden –

different if could be converted into cash, then would be money’s worth)- Frequent flyer points are not income, even if travel is work related (Payne v FCT)

Exempt income: can be exempt because entity is exempt entity (s 11-5), type of income is exempt (s 11-10), or the income is exempt because it’s derived from a certain entity (s 11-15).

Prime Minister’s Prizes (s 11-10)

Scholarships, bursaries from university (s 11-15)

Non-assessable, non-exempt income: (s 11-55: list of provisions; Div 59 particular amounts)

Fringe benefits are non-assessable, non-exempt income (s 23L ITAA36)


BUSINESS INCOME

Are any receipts business income?

1. Is [taxpayer] carrying on a business? The alternative may be hobby OR mere realisation of an asset

Includes any profession, trade, employment etc, but NOT occupation as an employee (s 995-1)

It is a question of fact and degree (Evans), factors to consider include:

- System and organisation of record keeping Use of accounting systems, expert advice, use of methods similar to other

businesses (Ferguson)

- Scale of activities A business is expected to operate on a scale beyond that of ordinary

domestic needs BUT this is not decisive – a person may conduct a business in a small way

(Walker; Rutledge; Thomas)

- Extent to which the activities involve sustained, regular and frequent transactions Courts recognise businesses may go through normal periods of quiet One-off transaction may be a business if large enough (St Huberts Island)

- Profit motive However, the fact that a business doesn’t earn a profit doesn’t mean it’s

not a business

- Commercial character of transactions

- Characteristics or quantities of property Where goods inherently unsuited to domestic use / in vast quantities (eg.

Rutledge)

- Inherent characteristics of the taxpayer Eg. company unlikely to be engaged in a “hobby”

Note : if sports players, boats or art dealers – see lecture notes!

2. Are the receipts a normal part of carrying on that business? Just because a business is established does not necessarily mean all receipts are

income.

Timing:- Activities in preparation of business are not assessable income (Softwood Pulp)- Activities after termination of the business are not assessable income (AGC)

Only the ordinary proceeds of the business are assessable.

Mere realisation of assets / investment = not income (Californian Copper; Scottish Mining – doesn’t matter if you make a profit if you were just realising an asset)

Sometimes one-off transactions can be income – case by case basis (California Copper; Whitfords Beach; Myer Emporium)


- Note : TR 92/3: factors to look at: nature of the entity; nature & scale of activities; amount of money and profit involved; complexity of trans; connections between parties to the trans; nature of property acquired/disposed of; timing of trans / steps in trans

INCOME FROM BUSINESS CASES:

Evans : gambler – held a number of jobs, very successful gambler, he had systems of record keeping, profit motive, frequent involvement etc. Held: was carrying on a business (??)

Trautwein : taxpayer was punter, owned horses, considerable amount of time and effort spent gambling – didn’t keep records Held: was carrying on a business, systematic betting on own and other horses, time organising activities,

farm for breeding horses, engaged agents, etc. The element of pastime / hobby was not his primary reason; the fact that he trained and owned horses reduced the element of chance

Ferguson : naval officer, leased cows, incurred leasing, insemination fees, insurance premiums etc. argued size of activities was too small Held: while size of activities is relevant, not determining factor, if activities are commercial, regular and

recurrent indicate a move from hobby to business Just because carrying on a business elsewhere doesn’t mean can’t be carrying on another business

Walker : taxpayer real estate agent; wanted to breed goats – spent lots but was largely unsuccessful – costs were far greater than what he earned Held: was carrying on a business because: intended to make a profit, regularity in activities, kept detailed

books of accounts, read journals etc. Just because the activities were small in scale didn’t preclude them from being a business

Rutledge : purchased toilet paper, resold for profit, taxpayer argued domestic, court held business

Thomas : barrister, had avocado trees – irrigation was bad etc, wanted to claim deductions Held: was carrying on a business, scale was significant, was much greater than domestic needs

St Huberts Island : taxpayer purchases and sold one block – was large enough to be a business as purchased for resale

AGC : business had ceased operating, then resumed activities, FCT argued cease of business Held: break in continuity of business IS possible, doesn’t necessarily mean termination, if business after

break is substantially different will = termination of first business

California Copper : company engaged in mining copper, and sold land to other company for profit Held: where owner chooses to realise asset and gets a greater price, NOT subject to income tax – if the

land was purchased with profit motive, then will be income (not just realising an asset)

Scottish Mining : acquired land for mining, when went to sell it, did things to get best possible price for it, not income just realising an asset

Whitfords Beach : Change in shares of company, went from fisherman to developers Held: Gibbs: became irrelevant was land was originally purchased for, was NOW in business of selling

land; Mason & Wilson: even without change, activities were so large that business had entered into new business of developing land (suggests Scottish Mining may be decided differently now)

Myer Emporium : Held: was a profit-making scheme and assessable. Where circumstances suggest profit-making

intention, can be assessable. 2 limbs of reasoning:

- Extraordinary transactions : may be income where trans and the profit was made in the course of carrying on a business AND intention of entering the transaction was to make profit from it

Application of first strand: where lease incentive – paid to move from one building to another was a proceed from business

- Income conversions : amounts received as comp for lost income are themselves income


STATUTORY INCOME

Are any receipts statutory income? Assessable income includes statutory income (s 6-10).

[Note: residency rules as above – if Aus resident statutory income is from all sources; if not resident, includes income just from Aus source]

Includes:

Div 15:

- Allowances in respect of employment (s 15-2): 3 elements:1. Must be a benefit / allowance2. Benefit must be “allowed, given or granted”3. Nexus with employment / services rendered

Things not included: super lump sum; annual leave payment; dividend; amount assessable as ordinary income under s 6-5 (s 15-2(3)(d)) etc.

Note: most things will be fringe benefit, ordinary income or not income, so section doesn’t really work…

- Return to work payments (s 15-3)

- Royalties (s 15-20)

- Indemnity for loss of assessable income (s 15-30)

- Interest on early payment or overpayments of tax (s 15-35)

- Reimbursed car expense (s 15-70)

Trading stock adjustments (Div 70)

… and of course: CGT (s 102-5)

CONFLICT RULES

Where an amount is both ordinary \ and statutory income, it will be included as assessable income once only (s 6-25). The statutory income provisions prevail over the rules about ordinary income unless otherwise provided (eg. s 15-2).

CASES:

Payne : frequent flyer points weren’t “allowance” because weren’t related to employment or services rendered

Cooke and Sherden : business of selling soft drinks – free holding, couldn’t be converted to cash not related to service of selling soft drinks so NOT allowance


TRADING STOCK

Is [product] trading stock? Some items normally considered capital may be trading stock and impact assessable business

income (an adjustment for movement in stock)

Trading stock is : Anything produced, manufacture red or acquired That is held For the purpose of manufacture, sale or exchange In the ordinary course of businessIt includes livestock (s 70-10(b))

Examples : land (if in bus of selling land), CDs for music store, shares for share trade, clothes for retailer

Adjustment (s 70-35): Compare the value of all trading stock on hand at the START of the income year; and the

value of all trading stock on hand at the END of the income year (s 70-35(1))

Where stock has increased during the year, excess is included in assessable income (s 70-35(2)).

Where stock has decreased during the year, a deduction is allowed for the reduction (s 70-35(3)).


SOURCE

Where was the income sourced? [Look at this at same time of determining whether ordinary income or not]

ONLY RELEVANT WHERE NON-AUS RESIDENT

Services (/ substitution for salary) : tends to be where the services are performed (French), may also be the place of contract (Mitchum).

Interest : where contract is made (Spotless Services Ltd)

Rental Income : location of real property (Rhodesia Metals)

Dividends : place where the profits out of which the dividend is paid arise (s 44(1) ITAA36)

Services Place of performance of services May also be place of contract or where money is paid

FC of T v French (1957) 98 CLR 398 FC of T v Efstathakis 79 ATC 4256 FCT v Mitchum (1965) 113 CLR 401

Business income / trading stock

Depends on business but generally where trading activities takes place – may require apportionment C of T (WA) v D & W Murray (1929) 42 CLR 332 FC of T v United Aircraft Corporation (1943) 68 CLR 525

Rental income Location of real property, however, may be where contract entered into if moveable property Rhodesia Metals Ltd (in liq) v C of T [1940] AC 774

Sale of property (not trading stock)

Place where contract entered into, subject to particular rules for some types of property (shares etc)

Interest Place where contract is made and money advanced FC of T v Spotless Services Ltd 95 ATC 4775

Financial transactions / insurance

Place where services of the company are performed Tariff Reinsurances Ltd v CT (Vic) (1938) 59 CLR 194

Thorpe Nominees v FCT (1988) ATC 4886

Dividends Place where profits out of which dividend is paid arise s 44(1) ITAA 1936

Royalties Outgoing royalty – s 6C ITAA 1936 deemed to be Australia, otherwise location of IP

CASES:

Carden’s Case : want a substantially correct reflex of the taxpayer’s true income

Firstenberg : reasonable for sole practitioner solicitor to use cash basis

Henderson : large firm, 19 partners, 295 staff changed methods from one year to next Held: uncollected fees in prior year could not be taxed in next year when changed methods; size

and structure were relevant – here was appropriate to change to accruals method, that method reflected true reflex of the period


DERIVATION OF INCOME

When was the income derived?

Ordinary income is that derived during the financial year (s 6-5(2)).

Two methods of timing:

Cash receipts method : recorded when the case is received

- Use for salaries and wages (use if primarily applying personal expertise – services rendered) (Carden’s Case; TR 98/1)

- Use for income from property – eg. rent / interest (Carden’s Case; TR 98/1)

- Use for dividends (Carden’s Case; TR 98/1; s 44)

- Smaller businesses

Accruals basis : recorded when payment of the debt can be enforced (ie. when invoice sent)

- Use where selling trading stock etc (Carden’s Case; TR 98/1)

- Larger firms (size and structure is relevant) (Henderson)


GENERAL DEDUCTIONS

Are there any general deductions?

An amount is deductible to the extent it was incurred in gaining assessable income, provided no negative limbs apply (s 8-1). APPLY [apportion if relevant]

An amount is deductible to the extent it was incurred in carrying on a business to gain assessable income, provided no negative limbs apply (s 8-1). APPLY [apportion if relevant]

Apportionment : Deduction can only be included to the extent the nexus is made (Ronpibon; Ure). [ie. if used partly for private purposes, that part is excluded]

Whether the nexus is made depends on the character of the deduction (Charles Moore)

Courts do not tell the taxpayer how much to spend (Cecil Bros).

Section 8-1: General DeductionsA loss or outgoing can be deducted from assessable income to the extent that:

It is a loss or outgoing incurred in gaining or producing assessable income; OR It is a loss or outgoing necessarily incurred in carrying on a business for the purpose of

gaining or producing assessable income.

A loss / outgoing cannot be deducted if (negative limbs): It is capital:

Once and for all test (Vallambrosa Rubber): capital is a thing spent once, income expenditure recurs every year

Enduring benefit test: when expenditure made to bring an asset into existence = capital Fixed or circulating capital test: expense related to fixed capital = capital; related to

circulating capital = revenue Business entity test (Sun Newspapers): things to set up business = capital:

- Does exp relate to business structure or operating it?- Nature of the asset or advantage sought?- Degree of recurrence of the expenditure

It is of a private or domestic nature:

Home Study / Office : 2 types of expenses:

- Occupancy expenses (rates / repairs): Deductible if place of business Not deductible if for convenience (ie. if you’re just doing work at home but

actually have an office elsewhere)

- Homes study expenses (lighting / depn on computer): Need nexus with gaining income Apportion for private vs business use

- Cite: Handley; Forsyth; TR 93/30

Clothing : generally not deductible because private in nature 5 categories:


- Conventional clothing: generally not deductible

Note : Edwards: private secretary to Gov could deduct ball gowns; Mansfield: air hostess allowed to deduct DVT stockings for “safety”; Morris: allows to claim sunscreen and sunglasses

- Note : if have suit ONLY wear to work might meet first limb, but private

- Compulsory uniforms [see specific deductions for these]

- Non-compulsory uniforms

- Occupational specific clothing

- Protective clothing

Travel : Home / Work:

- Cost of travel between home and work not deductible (Lunney and Hayley)

- Cost of travelling between unrelated workplaces specifically deductible (s 25-100; Payne)

Child Care : not deductible as is private in nature (Lodge)

Physical Fitness / Food : if specifically required to achieve particular level of fitness MAY be deductible (Cooper – tried to claim beer to bulk up, NO!)

Self-Education : generally deductible subject to the nexus requirement

- Initial qualification generally = capital

- Where it will increase qualification in field you’re in OR bring you up to date win profession = deductible (Hatchett; Finn; TR 98/9; TR 92/8; Anstis)

- Where going from one sort of lawyer to another = private (Case Z1)

- Note :

First $250 of self-ed from prescribed education course (for purpose of gaining qualifications) not deducible (s 82A ITAA36)

Cannot claim certain fees (eg. Fee HELP) (s 26-20)

It is incurred in relation to gaining or producing exempt income or non-assessable, non-exempt income

A provision of the Act prevents it being deducted

BUSINESS DEDUCTIONS

Are there any business deductions?

Is [taxpayer] carrying on a business? [will need to go back up to “Business Income”]

[If yes]: Amount is deductible as it was necessarily incurred in the carrying on of [taxpayer’s] business (s 8-1).

Do any of the negative limbs apply?

Note: where loss incurred before business starts / after it ends, it won’t be incurred in the course of carrying on the business (Steele (before); Amalgamated Zinc, AGC (after))

CASES:

POSITIVE LIMBS:

Charles Moore : taxpayer doing banking, was robbed = LOSS (loss caused by theft, stealing etc now covered by s 25-45 – see specific provisions, quite strict now)

Ronpibon : some apportionment required Sufficient and necessary that the loss/outgoing is found in whatever is productive of the income

Ure : solicitor took out loan at 12.5%, on-lent to family trust for 1% - tried to offset interest coming in at 1% against 12.5% interest expense Held: not an arm’s length transaction – only entitled to small portion (probably 1% deduction)

Day : has to be some income but irrelevant that income is less than deduction claimed – it is not for the courts to tell the taxpayer how much to spend (Cecil Bros)

Herald & Weekly Times : were sued for defamation, tried to claim legal fees as deduction, income from selling newspapers Held: court allowed the costs

Lunney & Hayley : essential character of transport to work was private – not deductible

Fletcher : in some circumstances, courts may look at the taxpayer’s purpose (eg. where trying to avoid paying tax)

NEGATIVE LIMBS:

Handley : barrister; expenditure related to home office not deductible – referable to the home

Anstis : entitled to deductions because income was youth allowance; expenses were in course of “earning” that youth allowance = nexus made


REPAIR CASES:

Western Suburbs Cinemas : replaced tin roof with fibro ceiling – made it functionally better – could have used cheaper materials, even if was improvement, said should have been able to deduct portion that cheaper roof would have cost Held: improvement and not deductible, portion not deductible either – where don’t choose

the allowable deduction, cannot have income assessed as if had chosen that deduction

Law Shipping Co : taxpayer on buying boat in un-repaired state had initial repairs not maintenance repairs (even though might have been maintenance repairs to previous owner)

SPECIFIC DEDUCTIONS CONT


SPECIFIC DEDUCTIONS

Are there any specific deductions?

A deduction for [deduction] may be claimable under specific provisions (s 8-5).

Clothing Conventional – general provision (generally not deductible except Edwards; Mansfield) Compulsory uniforms: deductible (TR 97/12) Non-compulsory: only deductible if design is registered (ss 34-10; 34-15) Occupation-specific: nurse uniform; chef checked pants = deductible (ss 34-10; 34-20(1)) Protective clothing: deductible (ss 34-10; 34-20(2))

Repairs Expenditure for repairs to premises is deductible to the extent the premises were used for

producing assessable income (s 25-10) (eg. rent). Capital is not deductible (s 25-10(3)).

- If renting out half your house, half repair $ will be deductible (TR 97/23)

A repair:- Replaces part of an item rather than the whole item:

Looking at whether thing can be separated in some way (Linsday; Lurcott v Wakely)

- Restores an item to its previous condition, without improving it: Expenses which lead to a functional improvement are capital in nature

(Western Suburbs Cinemas; Lindsay) Look at whether there are advantages over original etc…

- Is a maintenance cost rather than an acquisition (initial) cost Costs incurred in fixing defects which existed at time of acquisition =

capital (W Thomas & Co; Law Shipping Co; TR 97/23 (Odeon not Aus authority))

Bad Debts Debt must exist, must be bad, must be written off, must have been included in income in prior year (s 25-35)


Uniform Capital Allowance [Depreciation] Amounts equal to the decline in value of a depreciating asset held during the year are

deductible, to the extent it was used for a taxable purpose (s 40-25). - Depreciating asset (s 40-30)- Held = owner / lease / hired (s 40-40)- Taxable purpose = for producing assessable income (s 40-25(7))

Depreciating Asset : has an effective life and will decline in value - eg. plant and equipment (computers / office furniture etc)- NOT land or trading stock

Calculation :- Diminishing value method (pre 9 May 2006 =s 40-70; post 9 May 2006 =s 40-72):

- Prime cost method (s 40-75):

Immediate deductions are allowable for assets less than $300 predominantly used for producing assessable income, not in the course of a business (s 40-80(2)).

Gifts / Donations Gift: property must be transferred without any material benefit to the donor (Div 30;

McPhail; TR 2005/13)

- Cannot be a testamentary gift (will) (s 30-5(2))

Deductible where provided to certain entities listed in tables in Div 30 known as Deductible Gift Recipients (s 30-15) eg. public hospitals, public universities

Must be of at least $2 in value

Entertainment Not deductible under s 8-1 (s 32-5) = food, drink or recreation and accommodation to do with providing (s 32-10) Some exceptions – employer providing food to employees (but not for parties etc) (ss 32-

30; providing free entertainment for sick / disadvantaged people (s 32-50)

Tax-Related Expenses Deduct non-capital expenditure to the extent it is for managing tax affairs (expense must be to recognised tax advisor) and/or for the general interest charge / shortfall interest charge (s 25-5)

Borrowing Expenses Deduction allowed for exp incurred in borrowing money (eg. loan application fee) WHERE money is put to income producing purpose (eg. loan for rental property).

Deduction is over the shorter of 5 years / period of loan

Loss by Theft Deduct a loss if discover loss in income year, loss caused by theft etc, by agent or employee and money was included in income in prior year (s 25-45)


Travel / Car Expenses Where travelling overseas for work – s 8-1 principles apply. If self-education purpose,

deductible under s 8-1 (see above). - If relative travels with you, will have to deduct relative’s costs (s 26-30)

Cost of travelling between unrelated workplaces specifically deductible (s 25-100; Payne)- Not deductible if you reside at one of those places (s 25-100(3))

Calculating car expenses: 4 methods available (s 28-15)

- Cents per km (up to 5,000 business km) (Subdiv 28-C)

Deduct business km travelled x standard rate:

- 12% of original value (only use if more than 5,000 business km – no substantiation required) (Subdiv 28-D)

Deduct 12% of acquisition cost / market value if leased (to max car value of $57,180)

Deduction reduced if car not held for whole year

- 1/3 of actual expenses (only use if more than 5,000 business km – substantiation required) (Subdiv 28-E)

Deduct 1/3 car expenses

Car expenses (def s 28-13) – includes a loss or outgoing to do with operating a car and the decline in value of a car – no capital costs

o Cost of car is NOT car expense because it’s capital

o Parking and toll fees are NOT car expenses!

o ADD DEPRECIATION IN!!!

- Logbook method (no limitation – substantiation required) (Subdiv 28-F)

Deduct business us % x car expense [add depreciation]!

Steps:o Maintain log book for 12 consecutive weekso Record all trips made during this timeo At end of 12 weeks derive a business % for the vehicleo Bus % then applied to total car expenses during the income year

Subject to substantiation rules:


- 1/3 actual expenses (costs must be substantiated)- Logbook method (costs must be substantiated; logbook kept)

SUBSTANTIATION RULES (DIV 900):

Requires the taxpayer to prove the expense has been incurred Generally must show name of supplier, amount, nature of expense, date of expense etc No need for substantiation if total expenses under $300 (but once over $300 need all sub) Expenses less than $10 where no receipt obtained can be diarised If cannot substantiate, deduction denied

CONFLICT RULES

Where deductions are allowed under multiple provisions, the most appropriate provision will apply (s 8-10).


CGT

If asked to advise of taxable income – back to “Starting a question” page and work through! [Taxpayer’s] assessable income includes any net capital gain (s 102-5). [Taxpayer] cannot

deduct a net capital loss from income for any income year (102-10(2)). A loss can only be used to offset capital gains for the year.

Basic Concepts: A capital gain is the difference between sale (capital proceeds) and purchase price and other

certain costs (cost base) of an asset.

CGT Questions

1. Are proceeds ordinary income? No, it is capital, not income (Eisner v Macomber; Adelaide Fruit)

A capital gain/loss only occurs if a CGT event happens (s 102-20)2. Is there a CGT event?

Eg. Yes there is a disposal of an asset, so potentially an A1 event (s 104-5)

[check s 104-5 for events AND rules] Note: if death, see “CGT Effect of Death” below

If more than one event applies, use the one most specific to situation (s 102-25)

3. Is there a CGT asset (Div 108)3 Categories:1. CGT assets (s 108-5) : any kind of property or a legal or equitable right that is not property

- Includes: eg. 75% interest in an asset (s 108-5)2)); goodwill and partnership interests

- Exclusions : Cars: small vehicles that carry fewer than 9 passengers / loads less than 1

tonne (s 118-5; s 995-1) Where A1 event, asset acquired pre 20/09/1985 (s 104-10(5)) Trading stock (s 118-25)

2. Collectible assets : - Antiques, paintings, coins, jewellery, manuscript, artwork that is kept mainly for

taxpayer’s personal use or enjoyment (s 108-10(2)) Antique is object of artistic and historical significance over 100 years old

(TD 1999/40)If an asset is a collectable:- It must have cost more than $500 (if cost less = exempt) (s 118-10(3));- Capital losses on collectables can ONLY be offset against capital gains on other

collectables (s 108-10(1))- Collectible capital gains can be reduced by prior year losses of any CGT asset- Collectable losses can be carried forward (s 108-10(4))- A set=single collection, sale of part of set=disposal of part of collection (s 108-15)

3. Personal use assets : CGT asset (except land / buildings / collectables) kept for the personal use / enjoyment of the taxpayer (s 108-20(2))

- Threshold of $10,000 (s 118-10(3)) – eg. boat..? [see lect slides] – exempt


- If loss on PUA – disregard (s 118-20)) Acquisition date : when you became the owner

- A1 Event for land – contract date not settlement date (s 109-5)- A1 Event only applies to assets acquired post 19/09/1985 (s 104-10(5)(a))- Indexation : if asset acquired before 21/09/1999 (s 109-5)

CGT event date (disposal) : (s 104-10(3))

4. Capital proceeds: [what has been received]

Money received AND Market value of any other property received (s 116-20(1))

Modifications: apportionment / lump sum payment / non-receipt [see lecture slides wk 6]

5. Cost base: [what has been paid]

5 Elements:1. Money paid / property given (s 110-25(2)) or market value substitution rule (s112-20)

2. Incidental costs (s 110-25(3)): costs incurred to acquire CGT asset (s 110-35): Professional fees (s 110-35(2)) Costs of transfer (s 110-35(3)) Stamp / similar duty (s 110-35(4)) Costs of finding buyer / seller (real estate agent…) (s 110-35(5)) Costs of valuation / apportionment (s 110-35(6))Note: cannot claim anything deductible!!! (s 110-45(1B) – post 13/05/97; s 110-40(2) – pre 13/05/97) [to be deductible, must be income!!]

3. Non-capital costs of ownership (s 110-25(4)): includes interest on borrowed moneys, costs of maintenance, insurance, rates or land tax

Only applies to assets acquired post 20/08/91 Does NOT apply to collectables (s 108-30) / personal use (s 108-17)

Note: cannot claim anything deductible!!! (s 110-45(1B) – post 13/05/97; s 110-40(2) – pre 13/05/97) [to be deductible, must be income!!]

4. Capital exp incurred to increase/preserve value (s 110-25(5)): includes initial repairs (TD 98/19) [ongoing repairs in element 3] clearing land of trees (Vallambrosa)

5. Capital exp to establish title (s 110-25(6)): eg. caveats / dispute over boundary/fence

Indexation: Only for assets held for 12mnths, acq pre 11:45am 21/09/99 (s 114-1)Just say “Indexation is possible as asset was acquired pre 21/09/1999 (s 114-1).”

6. Net Capital gain / loss: Capital Gain = capital proceeds – cost base (s 100-45)

If a loss work out reduced cost base:

- Reduced Cost Base: if loss made on cost base, remove element 3 to get reduced cost base (s 110-55).


- If reduced cost base still > capital proceeds = capital loss which can be offset against any capital gains (otherwise loss sits there until gain is made)

7. Net Everything Off: Work out ALL capital gains and losses

Reduce gains by losses

Apply any previously unapplied capital losses (from previous years)

Reduce by discount % (if applicable) = capital gain x 50%Discount: Individuals / Trusts = 50% discount (s 115-100(a))- Only applies to CGT events (disposals) after 11:45am 21/09/1999 (s 115-15) and

where CGT asset held for 12 months or more (s 115-25(1))- Will give a better result than indexation (Note: discount OR indexation) (s 115-20)

Net capital gain / loss = [amount] (s 102-5)

Example CGT Question – A1 Event

1. Is ordinary income? No, it is capital, not income (Eisner v Macomber; Adelaide Fruit).

2. Is there a CGT event (Note: s 102-20)? Yes, A1 – Disposal of CGT asset (s 104-5)

CGT asset: Shares are a CGT asset (s 108-5)

Acquisition date: When shares were acquired, on [date] (CONTRACT date).

CGT event date (disposal): When sale contract was entered into, [date] (s 104-10(3)).


4. Cost base: [what has been paid]

5. Net Capital gain / loss:

CGT – DEEMED SEPARATE ASSETS

Separate assets include:

Building on post-CGT land if treated as separate because depreciating asset (s 108-55(1))

Building post-CGT on pre-CGT land (s 108-55(2))

Adjoining post-CGT land to pre-CGT land and converted to one title (s 108-65) Improvements to land and pre-CGT assets (ss 108-70; 108-85))

- CB for each unrelated improvement must be greater than (in year CGT event happens):

$119,594 2008/09 year $124, 258 2009/10 yearAND: more than 5% capital proceeds for the event


Need to calculate separate cost base for the separate asset and apportion capital proceeds

CGT – Effect of Death

Upon death, any capital gains / losses are disregarded (s 128-10)

1. Are proceeds ordinary income? No, it is capital, not income (Eisner v Macomber; Adelaide Fruit) Rules are modified when dealing with deceased’s estate (s 128-15):

A capital gain/loss only occurs if a CGT event happens (s 102-20)

2. Is there a CGT event? Eg. Yes there is a disposal of an asset, so potentially an A1 event (s 104-5)

3. Is there a CGT asset (Div 108) [If collectable / PUA – see above]

1. CGT assets (s 108-5) : any kind of property or a legal or equitable right that is not property

- Exclusions : Cars: small vehicles that carry fewer than 9 passengers / loads less than 1

tonne (s 118-5; s 995-1) Where A1 event, asset acquired pre 20/09/1985 (s 104-10(5))

Acquisition date : when you became the owner, date of deceased’s death (s 128-15(2))

CGT event date (disposal) (s 104-10(3))


Money received AND Market value of any other property received (s 116-20(1))

5. Cost base: 1. Money paid / property given (s 110-25(2)): Depends on date of acquisition:

- Asset was acquired (by deceased) pre 20/09/1985 so value would be market value at date of death (s 128-15)

- Asset was acquired (by deceased) post 20/09/1985 so value would be cost base at date of death (s 128-15)

2. Incidental costs (s 110-25(3)): costs incurred to acquire CGT asset (s 110-35):

3. Non-capital costs of ownership (s 110-25(4)): includes interest on borrowed moneys, costs of maintenance, insurance, rates or land tax

4. Capital exp incurred to increase/preserve value (s 110-25(5)):

5. Capital exp to establish title (s 110-25(6)): eg. caveats etc…

Indexation: Only for assets held for 12mnths, acq pre 11:45am 21/09/99 (s 114-1)Just say “Indexation is possible as asset was acquired pre 21/09/1999 (s 114-1).”

6. Net Capital gain / loss: Capital Gain = capital proceeds – cost base (s 100-45)

If a loss work out reduced cost base:


- Reduced Cost Base: if loss made on cost base, remove element 3 to get reduced cost base (s 110-55).

- If reduced cost base still > capital proceeds = capital loss which can be offset against any capital gains (otherwise loss sits there until gain is made)

CGT – Main Residence Exception

Capital gain / loss is disregarded if (s 118-110(1)):

CGT asset is:

A dwelling (s 118-115); OR- Includes unit of accommodation; caravan, houseboat or other mobile home; land

under the unit of accommodation (s 118-115)- Shed can be a dwelling (Re Summers) (2008)- Not land itself (TD 1999/73)

Your ownership interest in the dwelling (s 118-130):- Land : Legal or equitable interest or right to occupy- Dwelling other than flat or home unit : legal or equitable interest or right to occupy

or license- Flat or home unit : legal or equitable estate, licence, right to occupy, or share in

company that owns it- Joint ownership : exemption will apply only to joint owner/s who use property as

his/her main residence and in relation to their share

You are an individual (s 118-110(1)(a))

Dwelling was your main residence in the ownership period (s 118-125; s 118-110(1)(b)); AND

Depends on the circumstances (Couch):- Length of time taxpayer lived there;- Place of residence of taxpayer’s family;- Are personal belongings there;- Address for mail / on electoral roll;- Connection of services – gas, electricity, phone;- Taxpayer’s intention to occupy dwelling

Not enough to just have intention to occupy (Erdelyi; Couch)

Interest did not pass from the estate of deceased person (s 118-110(1)(c))

Extension of exemption to land: The exemption extends to land, provided the same CGT even happens to the land (s 118-

120(1)). If disposed of separately, no exemption for the block of land.

Extent the land is held for private / domestic purpose is a question of fact and degree (s 118-120(1)).

Maximum area is 2 hectares (s 118-120(2)).

Does not have to touch, only has to be close enough to give a nexus to main residence (TD 1999/68).

Timing Issue: [you generally acquire a dwelling before moving in]


From the time it is first practicable, [taxpayer] must move in to the dwelling (s 118-135; Re Chapman; Couch) Insufficient that you can’t move in because rented to others or inconvenient (Re

Chapman; Couch). [could cover required repairs though]

Changing main residence: Generally can only have once main residence at a time, but exception if acquire an interest in a

new main residence and still own the old one.

Both can be treated as a main residence for 6 months, from acquisition of new main residence AND ending of main residence in existing residence (s 118-140).

Conditions : 3 out of 12 previous months – existing residence was main residence; AND Existing residence NOT used for producing income in 12 months prior

Absences: You can treat a main residence as such even after it ceases to be (s 118-145).

Conditions : No other residence if your main residence If residence is used to produce assessable income – can only use s 118-145 for 6 years Each time dwelling becomes a main residence again, 6 year period restarts If dwelling not used to produce income, can treat it as main residence indefinitely

Renovation; Destruction: [see lecture slides]

CGT – Limitations to Main Residence Exception

Couples: Family entitled to one main residence exemption (s 118-170 to 118-175)

Spouses with more than one main residence must nominate one to obtain exemption, otherwise will only get portion (s 118-170)

If separate main residences for dependent children, must nominate one (s 118-175)

Land: exemption does not apply (s 118-165) [Note: different if under dwelling – see above]

Main residence for part of the period: Pro-rata formula Non-main residence days ÷ Days in ownership period (FY) (s 118-185)

Dwelling used to produce income: House used as main residence AND to produce assessable income = apportion

House used as a main residence AND work at home for convenience = all exempt

Sole use of property is for generating assessable income = no apportionment, no exemption

First use for income (Special Rule):


Where used as main residence entirely, THEN used to produce income, you are taken to have acquired for its market value at the time it was first used to produce income (s 118-192)

Conditions : partial exemption only, as used for producing income; income purpose was after 20/08/1996; would have full exemption if CGT event had happened before income producing

Dwelling produced income: [see lecture slides]

Capital gain (loss) increased by reasonable amount having regard to the extent which you would have been able to deduct the interest (s 118-190)

Conditions :

Residence used for all / part of the period for producing assessable income

Would have been able to deduct interest on money borrowed

Ignore use of dwelling for purpose of producing assessable income if fit within (s 118-145)

S 118-192 (“First use for income”) may apply

Inherited dwelling: A pre-CGT (pre 20/09/1985) dwelling is exempt if (s 118-195):

Disposed within 2 years from deceased’s date of death IF disposal post 20/08/1996; OR

Dwelling used as main residence from date of death until disposal by one or more of:- Spouse of deceased immediately before death- Individual with right to occupy dwelling under the will- Beneficiary of dwelling and they sold it

A post-CGT (on or after 20/09/1985) dwelling is exempt if it is the main residence of the deceased at date of death (s 118-195) AND:

Disposed within 2 years from deceased’s date of death IF disposal post 20/08/1996; OR

Dwelling used as main residence from date of death until disposal by one or more of:- Spouse of deceased immediately before death- Individual with right to occupy dwelling under the will- Beneficiary of dwelling and they sold it


GST - GSTA

Flat rate of 10%; payment made by entities, burden ultimately worn by consumer

Taxable Supplies:

GST is payable on taxable supplies (s 7-1 GSTA). Amounts of GST and ITC are set off against each other (s 7-5 GSTA).You make a taxable supply if (s 9-5 GSTA):

A supply is made for consideration; and Supply is “any form of supply whatsoever” (s 9-10 GSTA) including:

- Supply of goods (s 195-1 defn)- Supply of services- Grant / assignment etc of real property- Provision of advice or information - Does not include the supply of money (s 9-10(4) GSTA)- Can be supply even if unlawful (s 9-10(3) GSTA)

Consideration includes any payment, act etc in connection with a supply (s 9-15)

It is made in the course or furtherance of an enterprise you carry on; and An enterprise is an activity including (s 9-20 GSTA):

- Business (including profession, trade, employment etc)- Concern in the nature of trade- Lease, licence or other grant of interest in property- Activities of charities and religions- Includes commencement and termination activities (s 195-1 carrying on)

It is connected with Australia; and Goods delivered / made within Australia Goods imported / installed / assembled in Australia Goods exported from Australia (may be GST free) Real property that is in Australia

Registered entity, or required to be registered; and From 1 July 2007 – required to be registered if annual turnover greater than $75,000 (or if

non-profit, over $150,000) (s 23-5; 23-15; Regs) business’s own estimate is ok

- From 1 July 2000 – 30 June 2007 – turnover $50,000; non-profit $100,000

An entity is an individual, body corporate; corporation; partnership; trust (s 184-1)

Where not GST-free or input taxed (exclusions) (s 9-30 GSTA): A supply is GST-free if stated under Div 38 GSTA:

- GST is not charged- Input tax credits are available- Includes:

Food/drink [below] Education Health Child care Religious services

Charities Water Going concerns Transport


- A supply is input tax if stated under Div 40 GST is not charged Input tax credits are not available Various categories: financial services (NOT audit services); leases and

sales of residential property (property capable of being used as residence (s 195)); fundraising; medical consult

- To the extent a supply may be both, GST free (s 9-30(3) GSTA)

Food A supply of food is GST-free (s 38-2 GSTA)

Food is defined as (s 38-4(1) GSTA): Food and beverages (incl water) for human consumption (incl ingredients) Goods to be mixed with food Fats and oils marketed for culinary purposes

Food is not (s 38-4(1) GSTA): Live animals (other than crustaceans / molluscs) Unprocessed cow’s milk Grain, cereal or sugar not subject to any process Plants under cultivation

Exceptions (food that is not GST-free) (s 38-3; Sch 1 and 2 GSTA): Food consumed on premises (s 38-5) Hot takeaway food Prepared meals and food (Sch 1) Confectionary, savoury snacks, ice cream and biscuits (Sch 1) Bakery goods (Sch 1)

Creditable Acquisitions and Input Tax Credits (ITC): An entity is entitled to an ITC for any creditable acquisitions made (s 11-20 GSTA):

For consideration

Where entity registered / required to be registered

Acquisition (s 11-10 GSTA):- Goods or services- Receipt of advice / information- Acceptance of real property- Acceptance of right- Acquisition of financial supply etc

For a creditable purpose (s 11-15):- Means an entity acquires it in carrying on its enterprise AND

It does not relate to supplies that would be input taxed; The acquisition is not of a private or domestic nature (s 11-15(2)(b)) Is not wages to employees (s 9-2(b))

May be partly creditable (apportionment required) (s 11-30 GSTA)

Which is a taxable supply

FBT - FBTAA


For “benefits” provided to employees

FBT Year: 1 April – 31 March

The taxable value is reduced: If recipient (employee) contributes

FBT is self-assessed, liable to pay (s 66 FBTAA)

FBT Rate: Pre 1 July 2006 = 48.5% Post 1 July 2006 = 46.5%

Deductibility of FBT (for employer): 1 April 1994 – 30 June 2000

s 8-1 ITAA97 deduction FBT payable Deduct cost of benefit

1 July 2000 onwards: s 8-1 deduction for FBT payable:

- Type 1 benefit – Claim ITC- Type 2 benefit – No ITC claimed

Deduct cost of benefit

Impact on employees: Employee not taxed; FB is non-assessable, non-exempt income so cannot be assessable!! (s

23L ITAA36) Reportable FB on payment summary – reportable amount is grossed up x 1.8692 – relevant re:

HELP scheme, child support payments etc

FBT Question:1. Is there a fringe benefit (s 136(1) FBTAA)? [All leg FBTAA unless otherwise stated]

Is there a benefit: “any right, privilege, service or facility” (s 136(1)). Does NOT include:

o Salaries and wages (s 136(1)(f))o Payments to super fund (s 136(1)(j))o Employment termination payments (s 136(1)(lc))

Provided during the year of tax (1 April – 31 March) (s 136(1)): Allowed, conferred, given, granted, performed (s 136(1))

By employer (associate (related company etc) (s 159) / third party arranger): Current, future or former (s 136(1)) Other than the Cth or its exempt authorities (s 5 FBT App to Cth Act)

To employee :

Current, future or former (s 126(1))

In respect of the employment of the employee : By reason of… or in relation directly or indirectly (s 136(1))


Would the benefit have been provided if recipient wasn’t an employee?

2. What is the taxable value of the fringe benefit? Reduced by recipient’s contribution (apportioned)

“Otherwise deductible” rule (where employee would otherwise be allowed a deduction for the amount, comes off FBT; declaration must be provided by employee (s 24))

Still say what type it would have been…

3. What is the FBT liability?

Calculate taxable value of each benefit provided (less reduction amounts

Divide benefits into: GST creditable (Type 1) benefits All other (Type 2) benefits

Gross up taxable values: Type 1 x 2.0647 (s 5B(1B) FBTAA) Type 2 x 1.8692 (s 5B(1C) FBTAA) Aggregate non-exempt amount (s 5B(1E)-(1L)) [if relevant – see leg] – public, non-

profit hospitals etc…

Calculate FBT payable = Fringe benefit taxable value x FBT rate (46.5%)

SPECIFIC FBT EXAMPLES - FBTAA

Expense Payment Benefit (s 20-24 FBTAA)

Is a benefit provided? Employer reimburses or pays the expense of an employee (s 20)


- Contrast reimbursement (being “paid back” for something) v allowance (given estimated amount to cover charges to be incurred)

Allowances in respect of employment are statutory income (s 15-2) and included in assessable income (s 6-1; 6-5; 6-10 ITAA97)

Exempt expense payment benefits

- “No private use” declaration (s 20A) – can be for apportioned

- Accommodation expenses incurred because required to live away from usual residence due to employment (s 21)

- Car expenses where reimbursement is calculated according to distance travelled (s 22)

What is the taxable value of the benefit? In-house expense payment benefit : Does employer normally provide benefit to public? (s

22A)

External expense payment benefit : Amount of the expenditure incurred (s 23) LESS recipient’s contribution

Subject to “Otherwise deductible” rule : applies to employee only, employee provides declaration

Housing Fringe Benefit (s 25-28 FBTAA)

1. Is a benefit provided? Arises when:

An employee is provided with the right to use accommodation; and The lease or licence exists at a time; and Is the usual place of residence of the employee

Varies depending on: Where located – remote, non-remote or outside Australia Type of accommodation provided (eg. employer carries on business of renting that type

of accommodation vs employer which may have accommodation for other reasons)

2. What is the taxable value of the benefit? Generally market rental value, reduced by rent or other consideration payed by employee Where provided to an employee of a hotel, caravan park etc, and is essentially the same

as that provided to paying guests, TV is 75% of market rental value, less any rent paid


Property Fringe Benefit (s 40-44 FBTAA)

1. Is a benefit provided? Arises when employer provides any type of property to employee (s 40)

Provided when ownership passes

Exemption : property to current employee that is consumed on employer’s premises (s 41)

2. What is the taxable value of the benefit? In-house benefits :

Where employer manufactures benefit: If sold to manufacturers, retailers etc – lowest arm’s length selling price (s 42(1)(a)

(i)) If sold by retail – 75% of amount paid by public (s 42(1)(a)(ii)) Reduced by amount paid by employee Subject to “otherwise deductible” rule (s 44)

Where employer retails: Cost of property to the employer (ie. what they pay for it) (s 42(1)(b)) Reduced by amount paid by employee Subject to “otherwise deductible” rule (s 44)

First $1,000 of in-house benefits exempt (s 62) (was first $500 prior to April 07)

External benefits : Where employer acquires from a third party and provides – cost price (s 43(a)) Where employer does not provide but pays another – amount of payment (s 43(b)) Reduced by amount paid by employee Subject to “otherwise deductible” rule (s 44)


Miscellaneous EXEMPT Fringe Benefits (Div 13 FBTAA) Newspaper & periodicals for business purposes (s 58H)

Minor benefits (s 58P)

Work related items (s 58X) (mobile phone, brief case, calculator) Exempt if: Predominantly used for work purposes Can only provide 1 each year (unless replacement) (s 58X FBTAA)

Membership fees and subscriptions (s 58Y)

Taxi travel begin or end at work (s 58Z)

Removal & storage of household effects as a result of relocation (s 58B)

Frequent flyer points are excluded from FBT because personal contractual relationship between employee and airline (Payne)

Residual Fringe Benefit (s 45 FBTAA): if it’s not any other type If no private use declaration = exempt (s 47A FBTAA)

[NOT ON EXAM]

Car Fringe Benefit (s 7-13 FBTAA) Where car held by an employer is made available to an employee for private use

Elements (s 7 FBTAA):1. In respect of employment;2. A car;3. Is “held” by an employer; and4. Is available for the private use of an employee.

What is the taxable value of the benefit? 2 methods of calulating: Statutory formula (s 9) : if no election, this one applies (s 10(1))

- Taxable value = ABC – E [Note: will still gross up at end!!] D

- A = base value of car Cost price of car (s 9(2)(a)) – includes costs ass with delivery NOT rego /

tax on transfer NOT non-bus accessory (bull bar / sunroof) (s 136(1)) Reduced to 2/3 if provider holds for more than 4 yrs at start of FBT year Depreciation cost limit does not apply

- B = statutory formula [depends on km travelled] Number of km x days in year of tax

days in holding period

Total km Taxable value as % of BV:o < 15,000 26%o 15,000 – 24,000 20%o 25,000 – 40,000 11%o > 40,000 7%


- C = number of days during relevant year when car used privately

- D = number of days in tax year

- E = recipient’s contribution Must actually make the payment Must provide documentary evidence No docu evidence needed for fuel and oil – declaration is acceptable

Operating costs method (s 10) : if elected, and stat = less - stat formula applies (s 10(5))

- Taxable value = (C x (100% – BP)) – R [Note: will still gross up at end!!]- C = total operating cost of the car during the FBT period

Include (s 136(1)):o Car expenses (fuel, repairs, maintenance)o Registration (apportioned by days)o Insurance (apportioned by days)o FOR OWNED CAR:

Deemed depn (s 11(1)) – see lect slide Purchase Price x Rate (after 10/05/06 = 25%)

Imputed interest cost (s 11(2)) Purchase Price x Rate (YE Mar 09 = 9%; Mar 10 =

5.85%; Mar 11 = 6.65%; Mar 12 = 7.8%) PUT REST IN…

o FOR LEASED CAR: Lease costs

- BP = business % use of the car Logbook must be maintained for 12 consecutive weeks Valid for 5 years Separate logbook for each year = Business KM in period x 100%

Total KM in period

- R = recipient’s contribution


TAXATION OF COMPANIES

A company is a separate legal entity that pays tax on its taxable income (s 4-1) – flat rate 30% No tax free threshold Is a company that is incorporated (s 9 Corporations Act)

Definition for taxation purposes: A company is any body corporate / unincorporated association or body of persons but is NOT a

partnership (s 995-1) [includes building societies and sporting clubs]

Residency of a company: A company which is incorporated in Australia OR;

Which carries on business in Australia AND has either:

Central management and control in Australia; OR

Its voting power controlled by shareholders who are residents in Australia

Is a resident company (s 6 ITAA36).

Test 1: Incorporated in Australia: Self-explanatory

Test 2 & 3: Residency of Companies AND: Carries on a business in Australia – is a question of fact

Normal test as to whether a business is carried on includes: System and organisation of record keeping Scale of activities Activities involve sustained, regular and frequent transactions Profit motive Commercial character of transactions


Central management and control in Australia :

This is a question of fact (TR 2004/15)

Factors:

- Look at where the directors meet and do business (Koitaki)

- Where seal, minutes, books of account, member’s register kept (Koitaki)

- Where policy decisions are made (North Aus Pastoral Co)

- Where shareholders and general meeting make decisions (John Hood)

Malayan Shipping Co : Where all decisions carried out in Australia = Australian company

Koitaki : Where possibility of being a resident in two countries, look at that most of management control was in Sydney = Australia company

Voting power controlled by shareholders in Australia : usually greater than 50%

On share register (Patcorp Investments)


TAXATION OF PARTNERSHIPS

A partnership is not a separate legal entity so does not pay tax

Taxable income or loss distributed to the partners to be included with or offset against other income or carried forward

Tax liability on share of income is paid by individual partners

The various classes of income will retail their character in the hands of the partners

Characteristics of a partnership: A partner can be an individual, company, trust or partnership. A partnership cannot be a

company – they are mutually exclusive

Partnership defined s 5(1) Partnership Act 1891 (Qld): the relation which subsists between persons carrying on a business in common with a view to profit

Elements: carrying on a business in common AND profit motive

Partnership for tax purposes: A partnership is persons carrying on a business as partners or in receipt of ordinary income or

statutory income jointly (s 995-1)

Interest in partnership may differ for tax purposes (McDonald)

Significance of being a partner for tax purposes but not at common law is that you can’t draw up own partnership agreements because not “partners” – accountable for the share you actually hold – eg. husband had 25% rental property, wanted to get all deductions, no, could only get 25% (McDonald)

Whether a business is carried on in partnership (incl husband & wife partnerships) (TR 94/8): Mutual assent and intention Joint ownership of business assets Registration of business name Joint business account and power to operate account Extent to which parties are involved in the business Extent of capital contributions Entitlement to a share of net profits Business records

Trading in joint names and public recognition of partnership


Determining the tax liability of a partnership

Step 1: Calculate the net income / loss of the partnership under s 90 ITAA36 as if partnership is a taxpayer who is an Australian resident

Net income : assessable income of the partnership as if a resident, less all allowable deductions except those allowable under s 290-150 (personal super contributions) or Div (tax losses of prev years) 36 of ITAA97

Step 2 : Allocate that net income / loss under s 92 to individual partners according to each partner’s interest in the partnership

Requires distribution of net income / loss

Section 92:

- A resident partner is assessable on share of p/ship income/loss attributable to Australian and foreign sources (s 92(1)(a); s 92(2)(a) ITAA36)

- A non-resident partner is assessable on share of p/ship income/loss attributable to Australian sources only (s 92(1)(b); s 92(2)(b) ITAA36)

- eg.

Partner’s Salary: Because it is not a separate entity, a partnership cannot employ one of its partners (Ellis v Ellis) Any salary drawn represents an addition distribution of the partnership income TR 2005/7 : If salary exceeds partnership interest in available net income, excess is carried

forward to later years – the salary cannot increase the loss.

Drawing: a drawing if effectively a prepayment of a distribution of profits. Eg. 50% p/ship shares, $100,000 profit, you draw $10,000 – when profit split, you get $40,000 they get $50,000


TAXATION OF TRUSTS

Not a separate legal entity but separate reporting entity – lodges a tax return

Income is assessed in the year trust derives income, not when income distributed to beneficiaries. Income must be distributed at year end (or is assessable in hands of trustee)

Unlike p/ship, trust losses cannot be distributed – can be carried forward (if Sch2F 36 satisfied)

Trusts can be fixed (A = 50%; B = 50%); disrectionary (to A, B or C as trustee shall select); unit trust (A – 100 units; B – 500 units)

Beneficiaries: Bens of a fixed or unit trust have a proprietary interest in all the property the subject of the

trust (Charles v FCT)

Bens of a discretionary trust have no interest in the trust property until trustee exercises discretion in their favour – their only right is to have the trust duly administered (Livingson)

Determining the tax liability:Two Step Process (Div 6 ITAA97):

1. Calculate the net income of the trust (NITE) Means the total assessable income of the trust estate… as if the trustee were a taxpayer

and were a resident, less all allowable deductions (s 95(1))

Trust losses carried forward and offset against future income of the trust (diff to p/ship!)


2. Tax income in either the hands of the trustee or beneficiary (tax ben if possible (s 96)):

Is the trust income assessed in the hands of the beneficiary (s 97)? Consider: Present entitlement ?

o Legal (indefeasible) right to demand immediate paymento The person who will ultimately be taxed on the distribution (Whiting; Taylor)o Deemed present entitlement where: discretionary trust and trustee exercised

discretion and discretion exercised in favour of beneficiary (s 101)o Deemed present entitlement where there is an indefeasible interest (s 95A(2))

Resident at end of income year ?

Legal disability ?o Person cannot give a valid discharge for a payment made to them (Taylor)o Eg. Bankrupt, mental disability, child (under 18 years)

General Rules :

Where a beneficiary is presently entitled:

o And is an Australian resident at the end of the income year, not under a legal disability – the beneficiary is taxed on the distribution (s 97)

Amount includes shares of income of estate when they are a resident (s 97(1)(a)(i)); AND

Share of income of estate for period a non-resident that was sourced in Aus (s 97(1)(a)(ii))

o And is not an Australian resident at the end of the income year, or is under a legal disability – the trustee is taxed on the distribution (s 98)

Where there is no beneficiary who is presently entitled, the trustee is taxed on the top marginal rate

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