taxation law notes semester two 2017
TRANSCRIPT
Taxation Law Notes
Semester Two 2017
Table of Contents
Residence and Source
Individual (3)
Company (6)
Source of Income (7)
Ordinary Concept of Income (9)
Income from personal services and Employment (13)
3
Income from business
Trading Stock & Tax Accounting (24)
18
Extraordinary and Isolated Transaction
Income from Property (37)
Principles of Compensation (43)
Compensation for business losses (46)
32
Capital Gain Tax 49
Goods and Services Tax 66
Fringe Benefit Tax 81
General Deductions
Sun Newspaper: 3 factors (101)
Entertainment Expense (104)
Reimbursed Expenditure (104)
Relocation Expense (108)
Child Care Expense (108)
Travel Expense (108)
Car Expense (111)
Self-education Expense (112)
Home Office Expense (115)
Clothing + Dry Cleaning Expense (116)
Interest Expense (118)
Legal Expense (119)
Timing – Deduction & Deductibility (121)
96
Specific Deductions
Tax Related Expense (126)
Repairs (126)
Bad Debts (128)
Gifts (129)
Prior Year Losses (130)
126
Capital Allowances & Capital Works
Depreciation Deductions (132)
Balancing Adjustment (137)
Cars (137)
Pooling of Assets (138)
Capital Works Deductions: Division 43 (140)
‘Black hole’ expenses (141)
132
Tax Offsets 143
Tax Administration 150
Week 2 - Residence and Source
S6-5(2) ITAA97: A resident of Australia for tax purposes will be taxed on income from all sources
S6-5(3) ITAA97: A foreign resident for tax purposes will be taxed on income from Australian
source only
** Only one needs to be satisfied ** 4 tests of residence (individual)
1. Ordinary concepts; resides test (where you live)
2. Domicile (Where is your home) 3. 183-day test (Where have you spent
more than half a year) 4. Superannuation test (Are you a
member of the Australia superannuation fund?)
3 test of residence (company) 1. Place of incorporation 2. Central management and control 3. Controlling shareholders
Individual
Resides test
Macquarie dictionary – to dwell permanently or for a considerable time
Miller v FCT: The determination of tax residency rests on a question of fact and degree
If a person is a visitor, the frequency, regularity and duration of visits
Residency – moved abroad: IRC v Lysaght
Taxpayer partially retired and moved from England to an inherited estate in Ireland
Sold his home in England but remained a non-exec director of family company
Travelled to England approx one week per month
Held: taxpayer was resident and ordinary resident in the UK
The person’s family, business and social ties
Residency – temporary visits abroad: Levene v IRC
Taxpayer – resident of UK, retired and sold house
Lived in hotels, both in and outside UK
Held: Still a resident due to ties in the UK and temporary nature of stays overseas
Residency – family home in Australia and intention to treat Australia as home: Joachim v FCT
Migrated to Australia with family but he was unable to find job which results in him being outside Australia for 316 days
Family remained in Australia
Held: A resident of Australia as he maintained a home for his family in Australia and
despite his absence, his intention to treat Australia as his home had not change
Factors to be considered by the court
Time physically spent in Australia (not a strong factor)
Frequency, regularity and duration of visits (whether they are merely visitors)
Purpose of visits to Australia and abroad (work or holiday)
Maintenance of a place of abode in Australia for the taxpayer’s use
Person’s family, business and social ties (strong factor)
The person’s nationality (used in borderline cases)
Domicile 住所 Test
- Generally, applies to outgoing individuals where that person moves overseas (usually as a work posting), but does not change his or her domicile
- Domicile of origin at birth; domicile of choice: country where taxpayer intends to make
their home indefinitely - Does not apply if they can demonstrate that they do not have a ‘permanent place of
abode outside of Australia’
Permanent Place of Abode: FCT (Federal Commissioner of Taxation) v Applegate
Moved to Vanuatu to establish an office with wife for 2 years, with no assets left in Australia
Returned to Sydney for medical treatment
Intention: he would return to Australia eventually
Held: Taxpayer had a place of abode outside Australia. Court concluded: permanent meant something less than everlasting where it should not be contrasted with
temporary or transitory. Taxpayer had a permanent place of abode outside Australia and was not a resident.
Permanent Place of Abode: FCT v Jenkins
Transferred to Vanuatu for a fixed 3 years’ period, failed to sell home, cancelled health
insurance but maintained bank account in Australia
Repatriated back to Australia earlier
Held: Applied the decision in FCT v Applegate – held a permanent place of abode in Vanuatu
Ruling IT 2650 factors based on the cases above:
1. Intended and actual length of stay in the overseas country
2. Intention to stay overseas permanently or temporarily 3. Whether a home is established outside Australia
4. Whether the place of abode in Australia has been abandon 5. Durability of Australian Associations (bank account, family ties, children’s education)
6. Emphasis: Length of stay overseas (Rule of thumb: x > 2 years)
183-day test
- Requires physical presence in Australia for more than one-half of the year
- 2 limbs to the exception:
Taxpayer has a usual place of abode outside Australia
He or she did not intend to take up residence in Australia
Working holiday visa: Re Koustrup v FCT
Despite being in Australia for more than 183 days, she held a usual place of abode outside Australia and was therefore not entitled to the tax few thresholds
under the residency tax rates
19% income tax rate for taxable income up to $37,000 from 1 July 2017
Superannuation test
- Member of Commonwealth Superannuation fund is a tax resident of Australia
Company
Place of incorporation test
A company incorporated in Australia is automatically a resident of Australia
Central management and control test
Two limbs:
1. Company must carry on business in Australia
2. Company’s central management and control must be located in Australia
First limb: Carrying on business in Australia
Operational activities: where the activities take place.
Passive dealings: where the decisions are made.
Second limb: Central Management and Control
Where actual high level decision-making processes are made/developed.
Where the monitoring of overall corporate performance occurs.
Malayan Shipping Co Ltd v FCT: The central management and control of the company will be the
location of the actual decision making, rather than the formal execution of the director’s resolutions
Central management and Control: Koitaki Para Rubber Estates Ltd v FCT
Mere day-to-day control when there is a head office does not meet central management & control of company
Bywater Investments Ltd v FCT: CM&C in Australia where company Directors carried out the wishes
of their Sydney based accountant without independent judgment. (Directors have no idea, the
accountant was making all the decisions. He was based in Sydney, directors were overseas. Central management + control is in Australia.
Controlling shareholders test
Two limbs:
1. Necessary to demonstrate that the voting power is controlled by Australian residence
> 50% of voting power at general meetings
Patcorp Investments Ltd v FCT: It does not look through to the ultimate beneficial owner of the shares
2. Company carrying on business in Australia
Same as first limb in the central management and control test
Source of income
S6-5 and S6-10 of ITAA 1997: Resident of Australia is taxed on ordinary and statutory income from all
sources, while a foreign resident is taxed only on ordinary income and statutory income sourced in
Australia or deemed to be assessable income on some other basis.
Nathan v FCT (1918): Question of source has been described as “something which a practical man would regard as a real source of income” and a “practical, hard matter of fact”.
Categories of income:
Sale of goods (trading stock):
- The place where the trading activities take place
Sale of property other than trading stock:
- Real property: location of the property
- Other property: various factors needs to be considered
Source of income overseas: Rhodesia Metal Ltd (Liquidator) v Taxes Commissioner (1940)
A company incorporated in England with its central management and control in England.
In the business of purchasing and developing immoveable property in Rhodesia and the sale of that property
Went into liquidation, sold its undertaking to another company that is incorporated in England.
Held: Profits were derived from sources in Rhodesia
Source of income in Australia: Thrope Nominees Pty Ltd v FCT (1988)
Sale of land in Australia but contracts signed overseas
Profits were sourced in Australia
Services:
- Generally, the place of performance of the services. Alternatively, the place of contract.
Source of services income: FCT v French (1957)
An engineer employed by Australian company to work in New Zealand
Claimed that he was exempt from Australian income tax because the income was sourced in New Zealand
Held: Payment was for services performed in NZ, source of payment also from NZ.
Source of service income: FCT v Efstathakis (1979)
Greek national, moved to Australia to work as Greek Government public employee
Has been paid by cheques drawn on a Greek bank was subject to income tax in Greece
Claimed that the salary was exempt (free) from Australian tax
Held: Performance of the services in Australia and the receipt of payment in
Australia
Source of service income: FCT v Mitchum
US actor contracted through the various subsidiaries (UK, Swiss) and ended up performing in Australia
Source is not necessarily the place of performance. No conclusive decision
Interest:
- Place where the contract is made or the money is advanced (Spotless Services v FCT)
Dividends:
- The location of the profits out of which the dividend is paid
Esquire Nominees Ltd v FCT (Important case for non-residence)
“To the extent to which they are paid out of profits derived from sourced in
Australia”
A company incorporate in Norfolk and received dividends paid on shares held in
another Norfolk company
Dividend paid later flow to other two companies which originated from the
activities of a company resident in Australia
Held: The source of the dividends was the holding of the shares in the Norfolk Island Company. Not liable to Australian tax on the dividends pay.
Royalties:
- The place where the location of the industrial or intellectual property from which the royalty flows
- S6C of IRAA 1936: Deems the royalty to be sourced in Australia - E.g. Where the book was written (royalties)