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CORE SECTIONS.............................................................................6ASSESSABLE INCOME...................................................................6
Assessable Income.......................................................................................6Income or Capital? Income According to Ordinary Concepts..................8Is there a business?........................................................................................10Derivation of Income.....................................................................................11Residency........................................................................................................15
For Individuals: s6(1)(a)..................................................................................................15For Companies: s6(1)(b)..................................................................................................16For Trusts.........................................................................................................................17For Partnerships...............................................................................................................17
Source of Income...........................................................................................18Types of Income:..............................................................................................................18
Statutory Income...........................................................................................20Non-cash benefits from business relationships................................................................20Accrued Leave Transfer Payments..................................................................................20Allowances in relation to employment............................................................................20Reimbursed car expenses.................................................................................................20Defence forces rations and quarters.................................................................................21Return to work payments.................................................................................................21Employee Share Acquisition Scheme..............................................................................21Insurance or indemnity for trading loss...........................................................................21Recoupments....................................................................................................................21Profit on Sale of Leased Motor Vehicles.........................................................................22Profit Making Undertakings or Plans...............................................................................22Work in Progress..............................................................................................................22Royalties...........................................................................................................................23Insurance Recoveries on Losses of Live Stock................................................................23Gains on Disposal of Traditional Securities.....................................................................24Bounty or Subsidy............................................................................................................24Interest on overpayment of tax.........................................................................................24Interest under will, etc......................................................................................................24Bonus................................................................................................................................24Recovery of Embezzlement, etc, loss..............................................................................24Meals provided to clients, etc in In-House dining facilities.............................................25Receipts from a film.........................................................................................................25Investment related lottery winnings.................................................................................25Dividends.........................................................................................................................25Prizes and Awards............................................................................................................25
Personal Services Income.............................................................................26Exempt Income..............................................................................................28
Exempt Organisations......................................................................................................28Exempt Amounts..............................................................................................................29Overseas Employment Income........................................................................................30Foreign branch profits......................................................................................................31Non-portfolio dividends...................................................................................................31
ALLOWABLE DEDUCTIONS......................................................32
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GST Implications...........................................................................................32Business Deductions......................................................................................33Some Specific Items Deductible Under s8-1...............................................36
Travel Expenses...............................................................................................................36Interest Expenses..............................................................................................................36Damages and Penalties.....................................................................................................39Payments and Benefits provided to employees................................................................39Foreign Exchange Losses.................................................................................................39Expenses on Commencement and Cessation...................................................................40
Deductions Under Specific Provisions.........................................................41Repairs..............................................................................................................................41Payment for non-compliance with a covenant to repair...................................................42Bad Debts.........................................................................................................................42Borrowing costs...............................................................................................................43Mortgage Discharge Expenses.........................................................................................44Expenses relating to lease documents..............................................................................44Expenses relating to granting of patents..........................................................................44Pensions, Gratuities and Retiring Allowances.................................................................44Tax related expenses........................................................................................................45Subscriptions....................................................................................................................45Costs associated with meeting GST obligations..............................................................45Legal Expenses.................................................................................................................45PLS 2 -66..........................................................................................................................45Gifts, Pensions..................................................................................................................46Loss on Disposal or Redemption of traditional securities...............................................47Debt/Equity Swaps...........................................................................................................47Payments to Related Entities............................................................................................47Loss by Theft or Embezzlement......................................................................................48Expenditure on Research and Development....................................................................48Mains Electricity Connection...........................................................................................49Loss from Profit-Making Undertakings or Plans.............................................................49Superannuation Contributions..........................................................................................49Environmental Impact Expenditure.................................................................................49Environmental Protection Expenditure............................................................................49
Commercial Debt Forgiveness.....................................................................50Non-Deductible Expenses.............................................................................51
Expenditure related to a capital gain................................................................................51Taxes, charges, penalties or fines.....................................................................................51Club Fees and Expenditure Relating to Leisure Facilities...............................................51Entertainment Expenses...................................................................................................52Employee car expenses....................................................................................................53Travel expenses of an eligible relative.............................................................................53Employee car parking expenses.......................................................................................54Reimbursement of employee’s expenses.........................................................................54Non-cash business benefits..............................................................................................54Occupational Clothing.....................................................................................................54Limits on certain deductions............................................................................................54Self Education expenses...................................................................................................54Anti-Avoidance provisions..............................................................................................55
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Employment Deductions...............................................................................56Specific Deductible Expenses.......................................................................56
Employment Agreements.................................................................................................56Business association subscription....................................................................................56Clothing and Laundry......................................................................................................57Home office expenses......................................................................................................57Self-education expenses...................................................................................................58Motor Vehicle Expenses..................................................................................................59Superannuation Contributions..........................................................................................60
Prepayments..................................................................................................61Depreciation and Capital Works.................................................................63
GST related expenses.......................................................................................................67Computers Hardware and Software.................................................................................67
Deductions for Capital Works.....................................................................69Business Related Cost – Blackhole Expenditure........................................70Tax Losses......................................................................................................71
Foreign Income Losses....................................................................................................72Losses of Previous Years:................................................................................................72Current year losses...........................................................................................................74Transfer of Losses............................................................................................................75
Trading Stock................................................................................................77What is trading stock?......................................................................................................77Types of trading stock......................................................................................................77Trading stock – Assessable Income/Allowable deduction:.............................................78When Is trading stock ‘on hand’......................................................................................79Trading stock valuation....................................................................................................80Trading Stock Issues:.......................................................................................................81Disposal of Trading Stock................................................................................................82
CAPITAL GAINS TAX...................................................................85What is a CGT Asset?...................................................................................85
Separate Assets.................................................................................................................85Personal Use Asset...........................................................................................................86Assets of Non-Residents..................................................................................................87
CGT Events:..................................................................................................87Which Entity Makes the Gains/Losses........................................................87Timing of Acquisitions and Disposals:........................................................88CGT Exemptions and Concessions..............................................................89
Subdiv. 118-A Exemptions..............................................................................................89Main Residence Exemption.............................................................................................90Reduction of capital gain otherwise assessable...............................................................92
Cost Base and Reduced Cost Base...............................................................93Capital Proceeds...............................................................................................................93Cost Base..........................................................................................................................94Reduced Cost Base...........................................................................................................96Modifications to Cost Base..............................................................................................97
Calculation of Gains and Losses..................................................................99NET Capital gains and Losses.........................................................................................99
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Discount Capital Gain....................................................................................................100Capital Gain Averaging Provision – Individuals ONLY...............................................101
Rollovers.......................................................................................................102Disposal or Creation of Assets in a Wholly Owned Company by Individual or Trustee........................................................................................................................................102Partnership Asset Rolled over to Wholly Owned Company..........................................103Transfer of Assets Between Group Companies in the Same Wholly Owned Group.....103
Small Business Concessions........................................................................105General Conditions.........................................................................................................105Small Business 15 Year Asset Exemption.....................................................................107Small Business 50% Active Asset Concession..............................................................107Small Business Retirement Exemption..........................................................................107Small Business Asset Rollovers.....................................................................................108
Transitional Provisions...............................................................................109Change in Majority Underlying Interest........................................................................109Sale of Pre-CGT Interest in Interposed Entity...............................................................109
PARTNERSHIPS...........................................................................110Definition of Partnership............................................................................110Calculating Partnership Net Income or Loss...........................................111
WIP Payments................................................................................................................111Dividends.......................................................................................................................111Partners’ Salaries............................................................................................................111Interest Payments...........................................................................................................111Superannuation contributions.........................................................................................112Payments to Relatives and Related Entities...................................................................112
Calculation of Partners’ Taxable Income.................................................112Change in Partnership Structure...............................................................112
TRUSTEES AND BENEFICIARIES...........................................113Present Entitlement and Legal Disability.................................................113Trust Income................................................................................................113
What is Taxed?...............................................................................................................113Residency and Source....................................................................................................113
Trust Losses.................................................................................................114Trust Loss Tests.............................................................................................................114Implications of Family Trusts:.......................................................................................117
Net Income v. Accounting Income.............................................................118Taxation of Trust Income...........................................................................118
Beneficiary Presently Entitled and No Legal Disability................................................118Beneficiary presently entitled BUT under legal disability.............................................119Where no Beneficiary presently entitled........................................................................119Deceased Estates............................................................................................................119Receipt of trust income NOT previously subject to tax.................................................120Distributions out of corpus.............................................................................................120
COMPANIES..................................................................................121What is a Company?...................................................................................121
Public Company.............................................................................................................121
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Company Bad Debts....................................................................................121Tax Losses [also pg 65]................................................................................121Implications for Shareholders of Dividends.............................................121Franking Account........................................................................................123
Penalty Taxes.................................................................................................................123Franking Account returns and assessment.....................................................................125
Deemed Dividends.......................................................................................126Distributions by a liquidator...........................................................................................126Loans and Payments by Private companies...................................................................126Remuneration and Termination Payments.....................................................................126Off Market share buy-backs...........................................................................................126
FOREIGN INCOME, DEDUCTIONS AND CREDITS.............128Foreign Income............................................................................................128Foreign Losses.............................................................................................129Foreign Tax Credits....................................................................................129
FRINGE BENEFITS TAX (All Sections in FBTAA)..................131FBT liability calculation.............................................................................131Rebatable Employers..................................................................................132What is a Fringe Benefit?...........................................................................132Car Fringe Benefit.......................................................................................133Debt Waiver Benefit....................................................................................134Loan Benefits...............................................................................................134Expense Payment Benefit...........................................................................135Housing Benefit...........................................................................................136Living Away From Home Allowance Benefit...........................................136Car Parking Benefit....................................................................................136Property Benefits.........................................................................................137Residual Benefits.........................................................................................138Entertainment..............................................................................................138Other Benefits...............................................................................................139
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CORE SECTIONS
Sec 44(1) Dividends included in assessable incomeSec 207-20(1) Imputation credits included in assessable income – individual and
companiesSec 6AC Gross foreign income (including withholding tax) included in assessable
incomeSec 79D Foreign deductions are limited to foreign incomeSec 207-20(2) Entitled to an imputation credit tax offset – individuals and companiesSec 70-35(2) Opening stock > Closing stock = deductionSec 207-40(1) Imputation credit gross up and credit – partnershipsSec 207-40(2) Imputation credit gross up and credit – companiesSun Newspapers Ltd & Broken Hill Theatres
Expenses to eliminate the competition are capital
Sun Newspapers Ltd Expenses to set up a new market or business are capitalSec 40-25 Depreciation is deductibleSec 26-30 Travel expenses for accompanying persons are non-deductibleIT2625 Audit fees not deductible unless incurred – invoices or an agreement or
interim billingSec 109 Only a reasonable payment of director’s fees are deductibleS82AAC Superannuation deduction – ABL , paid and complying fundSec 43 Capital works after 26/2/92Sec 165-10 Losses carried forward to reduce taxable income
ASSESSABLE INCOME
Assessable IncomeSec. 4-15 Taxable Income = Assessable Income – Deductible Expenses
Sec 6-1(1)Definitions:Assessable income is ordinary income and statutory income.
Sec 6-1(2) Statutory income and ordinary income can be exempt incomeSec 6-1(3) Some ordinary income and some statutory income can be neither
assessable nor exempt income.Sec 6-5(1) Ordinary income is income according to ordinary concepts – assessable
unless exempt or made non-assessable.Sec 6-10(2) Statutory income is income included in assessable income by statutory
provision (see s10-5 for list of statutory income).Sec 6-20(1) Exempt income is income made exempt from tax by provision of the Act
(see s11-5 for list of exempt income).
Sec 6-5(2)Residency:Resident – assessable on ordinary income derived from all sources in or out of Australia.
Sec 6-10(4) Resident – assessable on statutory income derived from all sources in or out of Australia.
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Sec 6-5(3)(a) NR – assessable on ordinary income from sources within Australia.Sec 6-5(3)(b) NR – assessable on other ordinary income on basis other than being
sourced in Australia.Sec 6-10(5)(a) NR – assessable on statutory income from sources within Australia.Sec 6-10(5)(b)
Sec 23(r)
NR – assessable on other statutory income on basis other than being sourced in Australia.Income derived by a non-resident from sources wholly out of Australia is not assessable in Australia.
Sec 17-5 GST:Amount is not assessable income if it includes GST payable on a taxable supply.
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Income or Capital? Income According to Ordinary ConceptsEisner v. MacComber Income is ‘fruit’ and capital is ‘tree’ from which fruit is grown.
Van den Bergh v. Clarke Is it payment for profit making structure?Is consideration received in the ordinary course of business or is it related to the ‘whole structure of the taxpayer’s profit-making apparatus’. If it is structure, it is capital.
Scott v. C of T, GP International Pipecoaters
Character of receipt in taxpayer’s handsIncome means ‘income according to ordinary concepts and usages of mankind. Whether or not particular receipt is income depends on its quality in the hands of recipient.
Arthur Murray Accounting treatment of item:Factor to consider whether it is income or capital.
Myer Emporium Ltd v. FCT
Converting future income into present income?If merely converting future income into present income (received in form of lump sum), then income.Transaction entered into for profit-making purpose?Receipt is income if: Received in the ordinary course of carrying on a business Received outside the ordinary course of business (ie. unusual
transactions) but transaction was entered into with intention of making profit.
Received not in the course of business but there was profit making intention AND the transaction was entered into and the profit was made in carrying out a business operation or commercial transaction.
McCurry & Anor v. FCT Taxpayers who are NOT carrying on a business:If a profit is made, then it is income if: The taxpayer entered into the transaction with a profit-making
intention; AND The transaction was entered into, and the profit was made, in carrying
out a business operation or commercial transaction.
Dickenson v. FCT Payment to replace profit or profit-making structure?Payment for restriction of taxpayers future income-earning capacity is capital.If consideration is to replace profits, then income.If consideration is to replace profit making capability, then capital.
Scottish Australian Mining Co Ltd v. FCT; FCT v. Whitfords Beach
Realisation of Asset:Where there is a mere realisation of assets to best advantage, it does NOT give rise to income.
FCT v. Dixon Voluntary payment or gift:
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Brown v FCT
Voluntary payment or gift received as incidental to employment is assessable income
Gift of unit to former politician was remuneration for services rendered.IT 167 Windfall gains:
In absence of unusual features, a prize winning will not be assessable.
Heavy Minerals Ltd v. FCT
Federal Coke
Payment for variation, cancellation or breach of contractAmounts received in relation to variation, cancellation or breach of ordinary commercial dealing will be income.
Compensation for variation in contract, where no consideration of payment was given, and payment was not a product of any business or revenue-producing activity carried on by it - capital
Cooling v. FCT
Selleck v. FCT
Lease Incentives: Incentive paid to induce taxpayer to enter into lease of business premises is income. Distinguished from:Incentive was received in respect of establishment of new firm’s first base of operation.
Compensation Payments:Liftronic Pty Ltd v. FCT; FCT v. DP Smith
Amount received as compensation for loss of capital is capitalAmount received for loss of revenue is income.
McLaurin v. FCT; Allsop v. FCT
If no amount of payment can be identified as income, the entire amount is capital.
Allsop v. FCT If taxpayer has entitlement to a lump sum in full satisfaction of all entitlements or claims, the payment will be capital in nature.
Whitaker v. FCT Compensation for personal injury is income if in substitution for lost wages. Otherwise capital.
FCT v. Slaven Compensation for loss of earning capacity is capital.Barnett v. FCT Motivation of payer is relevant in determining whether receipt is capital
or income.
Where there is a reduction in liabilities:FCT v. Unilever Aust. Securities Ltd
For taxpayers in the business of borrowing and lending, profits made in the course of business of lending and borrowing money and repaying loans is income.
Warner Music Aust. P/L v. FCT
Does the release of indebtedness constitute a gain on revenue account or capital account?Where a trader carrying on a business is required to pay less due to an exchange fluctuations, it is a gain in the ordinary course of business and therefore income.
Subdiv. 20-ARecoupment of expenses:An amount received: By way of insurance or indemnity in respect of a loss or outgoing that
is or was deductible;
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In recoupment of a loss or outgoing that is or was deductibleIs assessable income – assessable in the year of receipt.
Is there a business?
IRC v. Livingstone; McInnes v. FCT
Commercial character:If the activities are carried on in the same way as is characteristic of ordinary trade in that particular line of business, then business.
Thomas v. FCT; Ferguson v. FCT
View to making profit:The activities of a business normally undertaken with a view to making a profit.
Inglis v. FCTScale of business:The higher the level of activity or the bigger the scale of the activities, the more likely it will be business.
Evans v. FCTSystematic and organised:A business should be systematically conducted and organised.
Edwards v Bairstow Characteristics or quantities of goods
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Derivation of IncomeCarden’s case Cash v. Accruals basis:
The method to be used depends on its ‘actual appropriateness’ and whether it provides a ‘substantially correct reflex’ of the taxpayer’s ‘true income’.
TD 93/18 Factors to be considered in choosing a method: Size of business Type of business Method of accounting Current practice in industry Overhead costs Policy for recovery of outstanding debts
TR 98/1 Receipts method appropriate for: Income derived by employee Non-business income derived from provision of knowledge or
exercise of skill possessed by taxpayer Business income where income derived from provision of knowledge
or exercise skill possessed by taxpayer. EXCEPT: Taxpayer’s income producing activities includes sale of trading
stock Outgoing incurred in day-to-day operations have direct
relationship to income derived. Taxpayer relies on circulation of capital or consumables to
produce income Taxpayer relies on staff or equipment to produce income.
Income from investments. EXCEPT: Interest from business of money lending Interest from everyday provision of credit as part of business Interest derived by taxpayer whose other interest is calculated on
accruals basis, who invest in fixed or variable interest securities cum interest; and
Interest from deposits made in ordinary course of business.
Earnings method appropriate for – business income derived from a trading or manufacturing business and business income from large professional practices. Factors: Size of business – larger the structure, more likely the reliance on
employees and capital equipment to generate income Circulating capital and consumables – larger the reliance. Capital items – larger the reliance to earn income on these Credit policy and debt recovery – if taxpayer readily gives credit and
relies on amounts owing by debtors to support drawings or other payments
Books of account – where books are kept, and the way they are kept.
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IT 2503 Sole professional practitioners and small professional firms may record income on cash basis.
IT 2639 To determine whether a practice can adopt the cash basis, consider: If practice has at least as many non-principal practitioners as principal
practitioners, then income considered to be derived from business structure – accruals basis
If fewer non-principal practitioners than principal practitioners, Commissioner will look at: Nature of activities Extent to which income depends on taxpayer’s own skill and
judgement Extent of income producing assets used to derive income Number of employees
Henderson v. FCT
FCT v. Firstenberg
FCT v. Dunn
Examples of when Cash or Accruals should be used:Large firm of accountants should bring fees to account on an accruals basis.Solicitor practicing as sole proprietor who only employed a secretary-typist-telephonist was held to be assessable on cash basisSole practitioner CA who did not generally employ a qualified accountant but did employ no. of regular employees and took responsibility for all work emanating from his office was held to be assessable on cash basis.
Sec 6-5(4)Constructive Receipt:You are taken to have received ordinary income as soon as it is applied or dealt with in any way on your behalf or as you direct (hence derived it).
Sec 6-10(3) You are taken to have received statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct (hence derived it).
Arthur Murray Advanced income:Where advance amounts are received for services to be provided, they are brought into account as income only when earned.STRICT APPLICATION:Advanced income can only be treated as unearned income only if: The taxpayer’s financial accounts are prepared on basis that advanced
payments are kept in a suspense or unearned income account and not treated as income until earned.
Where advanced payments are credited to revenue, but balance date adjustment is made to exclude unearned income from P&L
Otherwise, if included in P&L, it is earned income irrespective.
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FCT v. Australian Gas Light Co & Anor.
Trading Income – when recoverable debt arises:Trading income is derived when a recoverable debt comes into existence, ie. taxpayer not obliged to take any further steps before becoming entitled to payment.
Gasparin v. FCT Where land is sold as trading stock, the proceeds is recognised as income on settlement, not when contracts become unconditional – debt accrues to vendor on settlement (from this day, vendor cannot sue for sale price, only specific performance or damages).
TD 92/186 Long term construction contracts – two methods:These are contracts spanning more than 12 months. May return income under: Basic method – where income recognised when invoice is raised or
when contractor is entitled to raise invoice re work done. Estimated profit method – determine ultimate profit/loss and
recognise as income in the income year to the extent of completion.
IT 2534 Salary and wages – when received:Derived when received or otherwise made available to the taxpayer (whether for past or current services).
TR 93/11 Professional fees (on accruals basis) – when recoverable debt arises:If professional accounts income on an accruals basis, income is derived when a recoverable debt is created – ie. person is not obliged to take any further steps before becoming entitled to payment.When recoverable debt arises depends on arrangement with client. Eg. when client is billed, when work wholly completed, when work done progressively and payment is due at specific intervals.
TR 93/27; TR 98/1 Interest – when received:Derived when paid or credited BUT does not apply to banks and financial institutions or where interest is received as part of normal business activities, eg. overdue trading accounts – in this case, recognised when derived (IT 2227).
IT2227 Interest on overdue customer’s accounts/trading accounts still owing to a business at the end of the year of income is considered to be income derived during the year of income, not when the interest is received.
FCT v Hurley Holdings Commercial Bill premiumPremium is derived on a receipts basis approach, not apportioned over life of bill
Sec 44(1); TR 98/1 Dividends – when paid:Derived when received.
Div. 6; TR 98/1 Rent – when received:Derived when received. EXCEPT where rent is received as part of normal business activities.
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TR 95/7 Lay-by: Derived when buyer pays final instalment and goods delivered to
buyer. If lay-by terminated early, then amount forfeited and any associated
costs which the seller retains is derived when sales is terminated. For non-refundable service fee, deposit or charge, derived when lay-
by sale entered into. TR 98/1; TR96/20 Trading stock discount – at time of sale:
When trading stock sold under arrangement which provides for prompt payment discount, income derived at time of sale for the full invoice price. If the discount is subsequently accepted, the difference is deductible at the time that the payment is received.EXCEPT there must be virtual certainty, in light of past experience and policy that the discount amount will not be received by trader.
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ResidencyInternational Tax Treaties overrule to ITAA
For Individuals: s6(1)(a)Sec 6(1)
6(1)(a)(i)6(1)(a)(ii)6(1)(a)(iii)
Rules:There are 4 tests for determining residency for individuals:a) “Resides” testb) Domicile testc) 183 day testd) Cth Government Super fund test
IT 2681
TR 98/17
Resides Test:For business migrants: Purpose, frequency, regularity and duration of return trips to country
of origin. Family and business ties person has in Australia and country of origin Whether he/she is accompanied by his/her family to Australia and on
return trips to the country of origin; Whether person is employed in country of origin; Whether place of abode is maintain in country of origin or is available
for person’s use while there; Whether personal effects are kept in Australia or country of origin; Extent to which any assets or bank accounts are acquired or
maintained in Australia and in the country of origin; Whether the migrant has commenced or established a business in
Australia.
[NOTE: not for Australian residents returning to Australia after temporary stay overseas where they remained residents whilst overseas.]Looks at the quality and character of an individual’s behaviour while in Australia over a period of 6 months. Intention or purpose of presence; Family and business/employment ties; Maintenance and location of assets; and Social and living arrangements.Generally, when behaviour is consistent with residing here is demonstrated over 6 months, the individual is a resident.
For Australians going overseas:Use IT 2681.
IT 2650Domicile TestDomicile is Australia = resident unless person’s permanent place of abode is outside the country.For Australians going overseas: The intended and actual length of taxpayer’s stay in the overseas
country. Whether the taxpayer intended to stay in the overseas country only
temporarily and then to move to another country or to return to
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FCT v. Applegate; FCT v. Jenkins; Case Q68.
Australia at some definite point in time Whether any residence or place of abode exists in Australia or has
been abandoned because of the overseas absence; Whether taxpayer has established a home (ie. dwelling place, house or
shelter that is the taxpayer’s fixed residence) in the overseas country; Duration and continuity of the taxpayer’s presence in the overseas
country Durability of taxpayer’s association with a particular place in
Australia, ie. maintaining bank accounts in Australia, place of education for children, family ties, etc.
Last 3 factors above given more weighting.
Two years away = rule of thumb
For Companies: s6(1)(b)Sec 6(1)(b) 1936 A company is resident of Australia if:
It is incorporated in Australia; OR It carries on business in Australia AND has either:
Its central management and control in Australia; or Its voting power is controlled by shareholders who are residents of
Australia.
Malayan Shipping Co Ltd v. FCT
De Beers Consolidated Mines Ltd v. Howe
Esquire Nominees Ltd v. FCT
Koitaki Para Rubber Estates Ltd v. FCT
John Hood and Co Ltd v. Magee
Central Management and Control:The carrying on of a business must be linked with either central management and control in Australia or exercise of voting rights. The fact that a company has its central management and control in Australia would provide sufficient evidence to conclude that the company is carrying on at least part of its business operations in Australia.
Key factor in locating the central management and control is the place where the directors meet to manage the company’s affairs.
Even if directors are effectively influenced by other parties, if the directors still have the responsibility for management of the company, where the director’s meetings are held may remain as key factor.
If central management and control is spread between two countries, the company may be resident in both countries.
Need to determine who actually exercises central management and control of company. If shareholders in GM actually exercise central management and control, then it is the place where this meeting is held.
Kolotex Hosiery (Aust) Pty Ltd v. FCT
Adelaide Motors
Voting power controlled by shareholders:In determining control of voting power, may be necessary to consider all voting rights, not just those attached to issued shares.
Control means actual control and not the capacity to control
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For TrustsS95(2) Resident trust exists if:
A trustee of the trust was a resident at any time during the year; or The central management and control of the trust estate was in
Australia at any time during the year.
For Partnerships1936 s92 Impact of Australian laws on partnerships is determined by reference of
each partner and the source of income attributed to thems90 Partnership net income and loss is calculated on the assumption that the
partnership is a resident
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Source of IncomeTypes of Income:
FCT v. French; FCT v. Efstathakis
FCT v. Mitchum
Salary and Wages:Normally, income is sourced at place where work is performed.
BUT if work is of a highly specialised nature or special knowledge, skill or talent is required to such a high degree, the place where the knowledge is utilised may be of relatively little importance. Other factors, such as place where contract is executed is more significant.
FCT v. MitchumProfessional Services:Sourced at place where services performed. EXCEPT where making of the contract is more important (see above)
C of T (NSW) v. Cam & Sons Ltd; Thorpe Nominees Pty Ltd v. FCT
Trading or Business Profits:Sourced at place where trader trades or renders services. BUT if acts done by trader consist largely of making contracts, and their performance relatively unimportant, then place of contract is significant.
Esquire Nominees v. FCT
Sec 44(1)(a)
Sec 44(1)(b)
Dividend Income:Source is the place where profits out of which dividend is paid were made (ie. geographical location where income is made).
Australian residents include dividends paid out of profits derived from any source
A non-resident shareholder is required to include dividends paid by the company to the extent to which they are paid out of profits derived by it from sources in Australia.
Spotless Services v. FCT
Sec 25(2)
Interest income:Source is where the loan contract is made or where the funds are advanced (ie. where obligation to pay arose).
Interest deemed to be sourced in Australia if money borrowed is secured by a mortgage over any property in Australia.
Rhodesia Metals Ltd (in liq) v. CoT
Rent of Real Property:Sourced where real property is located.
Rent of personal property:Sourced where the hiring agreement is executed
FCT v. United Aircraft
Royalties:Arising from right to use property (eg. copyright, patents, trademarks, mines, oil fields) – sourced in country in which property is located.
Arising from technical knowledge and know-how, then sourced at place
18
Corporation
Sec 6C
where contract is made and the know-how is provided.
Specifically deems an Australian source for outbound royalties (ie royalties derived by NR) in most situations. For royalties paid to NR by residents which are not incurred by payer
carrying out a business outside Australia or through a PE is deemed to have a source in Australia.
For royalties paid to NR by NR where royalties is wholly or partly an incurred by payer in carrying on business in Australia or through PE in Australia.
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Statutory IncomeSec 10-5 Lists the types of statutory income
Non-cash benefits from business relationshipsCooke & Sherden
s21A(1)
s21A(2)
s21A(3)
s23L(2)
Non-transferable overseas holiday was not convertible into money – not income
Any non-cash benefit received from business relationships that are not convertible to cash are treated as convertible to cash, provided it is otherwise of an income nature
Non cash benefit is brought to account at (a) arm’s length value reduced by taxpayer’s contribution
If benefit is deductible as an expense of carrying on a business had the recipient incurred the cost, it is not assessable (otherwise deductible rule)
s21A amounts are exempted if less than $300 in a year of income
Accrued Leave Transfer PaymentsSec 26-10(2) A payment in respect of LSL, AL, sick leave or other leave payment that
an entity makes:a) re an individual’s leaveb) when entity no longer required to make payment re such leave; andc) to another entity when the other entity has started to be required to
make payments re such leave; andd) under an Australian law.
Sec 15-5 Includes in assessable income an accrued leave transfer payment received by a taxpayer (new employer).
Allowances in relation to employmentSec 26(e) Includes as assessable income allowances, gratuities, compensations,
benefits, bonuses and premiums provided in respect of, or for, or in relation directly or indirectly, to any employment or services rendered. DOES NOT INCLUDE: an ETP payment in lieu of AL or LSL amount deemed to be dividend received fringe benefit exempt benefit.
Reimbursed car expensesSec 26(eaa) Includes in assessable income amounts received by taxpayer as cents per
kilometre reimbursements of car expenses.NOTE: car expenses specifically excluded from FBT regime.
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Defence forces rations and quartersSec 26(ea) For members of the Defence Forces, required to include allowances
received as assessable income whether it is given in money, goods, meals, sustenance, use of premises or quarters – UNLESS it is FB or exempt benefit.
Return to work paymentsSec 15-3 Applies where:
amount received by taxpayer under arrangement that an entity enters into for purpose of inducing taxpayer to resume working or, or providing
services to, any entityIncludes amount received in taxpayer’s assessable income.
Employee Share Acquisition SchemeSec 26AAC (pre 3/95) Refer to PLS 198 to 1-108Division 13A (post 3/95)
Insurance or indemnity for trading lossSec 15-30 Includes in assessable income an amount received by way of insurance or
indemnity for the loss of an amount that would have been included in the taxpayer’s assessable income had it been received. AND the amount is not ordinary income, thereby escaping s6-5.
RecoupmentsSubdiv. 20-A Includes in assessable income amounts received as recoupment for certain
previously deductible losses or outgoings. MUST BE assessable recoupment
Sec 20-20
Sec 20-35(1)
“Assessable recoupment” Not assessable recoupment if it is ordinary income or statutory income
due to a provision outside Subdiv. 20-A. Includes amounts received by way of insurance or indemnity for
losses or outgoing deductible under any provision Other recoupments (other than insurance or indemnity) only
assessable if they relate to items which are deductions under one of the provisions listed in s20-30 (ref. Pg 1-20).
Assessable recoupments are included in assessable income if: Can deduct the whole loss or outgoing for current year; or Deducted or can deduct whole loss or outgoing for an earlier year.
Sec 20-35(2) Total of amounts of assessable recoupment cannot exceed amount of loss or outgoing.
Sec 20-35(3) Assessable recoupments received in advance of year in which loss or outgoing is deducted is treated as received in deduction year.
Sec 20-40(2) Method statement – ref pg 1-22
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Sec 20-45 Amount of assessable recoupment reduced where the loss to which the recoupment relates was deductible in accordance with capital allowance provisions and a balancing charge has arisen in the current year.
Sec 20-50(1) Total of what you can deduct for a loss is limited to a proportion of the loss.
Profit on Sale of Leased Motor VehiclesSubdiv. 20-B Operates to assess profits on sale of vehicle where:
Car is leased to the taxpayer or associate Lease payments are deductible Taxpayer or associate acquires car from lessor Taxpayer disposes of car for a profit.
Sec 20-115(2) Consideration receivable: If sold for specific price = price – expenses of sale Sold with other property and no specific price allocated to car = part
of sale price reasonably attributable to car – expenses attributable Traded in to buy another car = value of trade-in + other consideration
received Disposed of to an insurer as lost or destroyed = value received under
insurance policy.
Sec 20-115(1) Profit on disposal:Profit = consideration receivable – (cost to acquire car + any capital expenditure incurred after acquisition)
Sec 20-110(2); 20-125(2) Assessable amount:The lesser of: Profit on disposal (s20-115) Total deductible lease payments for period of lease (s20-110(2)(a)) Total amounts that could have been deducted for depreciation had the
taxpayer owned the car and used it 100% for business purposes instead of leasing it. (s20-120; refer Method Statement, p1-25)
Sec 20-130 If there are 2 or more leases of the car resulting in different amounts to be included in assessable income, include the largest amount.
Sec 20-135Sec 20-145Sec 20-155
Amounts NOT included:Where there has been an earlier disposal of the car for MVYou inherited the carCar was let on hire in circumstances set out
Profit Making Undertakings or PlansSec 15-15 Assessable income includes profit arising from carrying on or carrying
out of a profit-making undertaking or plan, PROVIDED profit is not:a) Assessable as ordinary income under s6-5b) Arises in respect of sale of post-CGT property
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Work in ProgressSec 15-50 Assessable income includes any WIP progress amounts that you receive.
RoyaltiesSec 15-20 Includes as assessable income an amount received as or by way of
royalty. BUT only assessable if: Fall within ordinary meaning of ‘royalty’ and Not assessable as ordinary income under s6-5.
Stanton v. FCT
Shorter Oxford English Dictionary
McCauley v. FCT
Ordinary meaning of royalty:Royalties fall under two heads:1) Payments which grantees of monopolies such as patents and
copyrights received under licences; and2) Payments which the owner of the soil obtains in respect of taking
some special thing forming part of it or attached to it which is allowed to be taken.
a) payment to land-owner for lessee of mine in return for privilege of working it;
b) sum paid to proprietor of patented invention for use of itc) payment to author, editor, or composer for each copy of a book, piece
of music, etc sold by publisher, or for representation of a play.
Payments received by grantor of a right to remove trees on the basis of amount of timber cut or removed under a right to do so, the amounts are receipts ‘as or by way of royalty’.
Sec 6(1); s995-1(1)
Sec 6C
Royalties assessable under s6-5 (statutory definition):a) amount paid or credited to the extent it is consideration for:
use or right to use copyright, patent, design or model, plan, secret formula or process, trade-mark, or other like property or right.
Use or right to use any industrial, commercial or scientific equipment;
Supply of scientific, technical, industrial or commercial knowledge or information
Supply of assistance that is ancillary and subsidiary to and is furnished as means of enabling the application or enjoyment of any of the above items
Reception or right to receive visual images/sounds transmitted to public by satellite, cable, optic fibre or similar technology;
Use or right to use in connection with TV broadcasting or radio broadcasting, visual images/sounds, transmitted by satellite, cable, optic fibre, etc.
Use or right to use motion picture films, films or video tapes in connection with TV or radio broadcasting.
b) undertaking that the use, supply or reception of the above items will not be made to anyone else. Ie. exclusive right.
Outbound royalties may be deemed to have a source in Australia.
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Insurance Recoveries on Losses of Live StockSec 385-130 Include as assessable income insurance received for loss of live stock, or
loss by fire of tress which are held as assets of a primary production. Can elect to include 20% of amount in each of the next 5 years.
Gains on Disposal of Traditional SecuritiesSec 26BB Includes gain made on disposal of traditional security as assessable
income.
Traditional security:include bonds, debentures, bills of exchange, deposits with financial institutions, loans and repayment contracts purchased after 10/5/89 which: do not have an eligible return; or have an eligible return, but return <1.5% of total payments x no. of
years in term of security.
Assessable gain = consideration received – acquisition cost.Sec 26BB(3); TR 96/14 Where not dealing at arm’s length:
Where parties are not dealing at arm’s length, the Commnr may apply arm’s length consideration. Will use discounted cash flow analysis if there is no established market from which an arm’s length value can be drawn.
Sec 118-20 CGT will apply:From 1/7/92, CGT provisions will apply to disposal of traditional securities which are not trading stock. Any taxable gain will be reduced to the extent that the gain has been included in assessable income under s26BB.
Bounty or SubsidySec 15-10 Assessable income includes a bounty or subsidy that:
a) you receive in relation to carrying on a business; andb) is not assessable as ordinary income under s6-5
Interest on overpayment of taxSec 15-35 Interest payable from ATO are assessable
Interest under will, etcSec 26(b) Beneficial interests derived under any will, settlement, deed of gift or
instrument of trust.
BonusSec 26(I) Amounts received by way of bonus other than reversionary bonus on
policy of life assurance.
Recovery of Embezzlement, etc, lossSec 26(k); s20-20 & 20-35 Amounts received by way of insurance, indemnity, recoupment, recovery
or reimbursement of losses through embezzlement, larceny, defalcation or misappropriation by an employee or agent where losses already allowed
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as deductions under s71.
Meals provided to clients, etc in In-House dining facilitiesSec 32-70(1) Includes as assessable income $30 for each meal provided in an in-house
dining facility to an individual other than an employee for 97/98 and subsequent years WHERE a deduction is claimed under s32-30.
Receipts from a filmSec 26AG Capital and revenue receipts from a film are assessable where taxpayer
has qualified for a Div 10BA deduction for capital investment in a film.
Investment related lottery winningsSec 26AJ Assesses value of prize drawn or decided on or after 24/12/91 under an
investment related lottery.3 elements to determine whether it is an investment-related lottery:1) prize must be won in a lottery or similar arrangement2) chance to win must arise due to taxpayer holding an investment with
an investment body3) betting chance not otherwise taxable.
DividendsSec 44(1) All dividends are assessable to a resident shareholder.
NOTE: applies only to dividends received directly. If received indirectly, assessed under s6-5 or trust provisions of Div. 6-6AAA.
Sec 44(1B) Deems dividends which are distributions on redemption, cancellation or reduction of capital, and those out of a share premium account, to have been made out of profit.
Prizes and AwardsIT 167 Prizes which are rewards for regular appearances on radio or television
programs are assessable.
Prizes won incidentally to taxpayer’s income producing activities or business is assessable. Eg. Kelly v. FCT.
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Personal Services IncomeSection 84-5
Sec 86-15(2)
Definition – PSI:Ordinary or statutory income of taxpayer or of any other entity where income is mainly a reward for his/her personal efforts or skills. Only individuals can have PSI Can arise if income is for doing work or for producing result Even though income payable under contract, does not stop income
being mainly a reward for person’s efforts or skills.
PSE:A company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals.
Section 84-10 Is individual employee?Application of the PSI provisions does not imply that the individual is an employee.
Sec 87-15(3)
Sec 87-15
Sec 87-20
Is there personal services business?If 80% or more of individual’s PSI is income from same entity, the PSI is a PSB: When the PSI is gained or produced, a PSB determination is in force
re the taxpayer’s PSI; and If the determination was made on application of a PSE, the
individual’s PSI is income from the entity conducting the PSB.
If less than 80% of PSI comes from one source, still treated as conducting a PSB if at least one of the 3 personal services business tests have been met:
1) Unrelated clients test:a) During the year, the individual or PSE gains or produces income from
providing services to 2 or more entities that are not associates of each other and are not associates of the individual or PSE; AND
b) The services are provided as direct result of individual or PSE making offers or invitations (eg. advertising) to the public at large or to a section of the public, to provide the services.
2) Employment test:For an individual, test is passed if:a) the individual engages one or more entities (other than associates of
the entity that are not individuals) to perform the work; ANDb) that entity performs, or those entities perform together, at least 20%
(by MV) of the individual’s principal work for that year.
For an entity, test is passed if:a) the entity engages one or more other entities to perform work, other
than individuals whose PSI is included in the entity’s income or associates of the entity that are not individuals; and
b) that other entity performs, or those other entities together perform, at
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least 20% (by MV) of the entity’s principal work for that year.
3) Business premises test:At all times during the year, the individual or entity maintains and uses business premises:a) at which the individual or entity mainly conducts activities from
which PSI is gained or produced; andb) of which the individual or entity has exclusive use; andc) that are physically separate from any premises that the individual or
entity, or any associate of the individual or entity uses for private purposes; and
d) that are physically separate from the premises of the entity to which the individual or entity provides services.
Sec 87-55 PSB determination:With a PSB determination, an individual will be treated as conducting a PSB. As PSE will be treated as having a PSB if a determination is in force re an individual’s PSI.
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Exempt IncomeSec 6-20(1) Amount of ordinary income or statutory income will be exempt income if
made exempt by a provision of the Act.
Sec 6-20(2) Ordinary income may be exempt if it is excluded from being assessable income.
Sec 23(r) Exempts from Australian tax income derived by a NR from sources outside of Australia.
Sec 23L Employment related benefits which are either fringe benefits or exempt benefits for FBT purposes are treated as exempt income so far as the employee is concerned.
Sec 118-12 Capital gains and losses do not arise where there is a disposal of an asset which was used only to produce exempt income, or which was owned by a taxpayer whose income is totally exempt.
FCT v. Australian Music Traders Association
TD 1999/38
TD 93/194
Principle of Mutuality:NOTE: principle of mutuality is that a taxpayer cannot derive income from payments made to himself.The essential elements of mutuality:1) when contributions are made to a common pool to meet an
indifferently beneficial objective and excess is returned to contributors, do not have to invoke the mutuality principle. These payments are capital.
2) In dealings confined exclusively to members, the entity does not generate an income amount.
3) If activities are extended beyond the associates, there are dealings out of which a profit/loss may be made.
4) If a business or commercial venture is undertaken, it does not matter that the contributors are members of the association.
Principle of mutuality does not apply to income derived by registered/ licensed club under an arrangement with an external party to conduct gaming or other activities on the club’s premises – they are assessable.
In cases where it is difficult to determine what percentage of income is from members’ and what is not, the Commissioner allows the use of a formula (ref. Pg 2-15)Expenses relating specifically to members are not allowable as a deduction.
Exempt OrganisationsSec 50-5 Charitable, religious, scientific and educational institutions and
funds.
Sec 50-10 Societies, associations or clubs established for community service purposes is exempt from tax under s50-1 and 50-10 if the special conditions in s50-70 are satisfied.
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Sec 50-15 & 50-1 Exempts income of employer or employee associations registered under a Cth, State or Territory law relating to settlement of industrial disputes and trade unions, whether registered or not (as long as they are located in Aust and incurs its expenditure and pursues its objectives principally in Aust.
Sec 50-20 & 50-1 Exempts income of friendly societies that are not carried on for purpose of profit to individual members and satisfy conditions in s50-70.
Sec 50-25 & 50-1 Exempt income of a municipal corporation or a local governing body, and of a public authority constituted under a Cth law.
Sec 50-30 & 50-1 Income of public hospital that satisfies conditions in s50-55 Non-profit hospital carried on by a society or association and
satisfying conditions in s50-55 Medical benefits organisation, health benefits organisation and a
hospital benefits organisation which are registered.All must not be carried on for purposes of profit.
Sec 50-35 & 50-1 Income of Phosphate Mining Company of Christmas Island Limited and British Phosphate Commissioners Banaba Contingency Fund.
Sec 50-40 & 50-1 Non-profit society or association established to promote the development of aviation or tourism, or agricultural, horticultural, industrial, manufacturing, pastoral, or viticultural resources in Australia.
Sec 50-45 & 50-1 Sports, culture, film and recreation – Societies and clubs that are not carried on for purposes of profit or gain to members and satisfy conditions in s50-70.
Exempt AmountsSec 51-5 Allowance or bounty paid to member of Defence Forces.
Sec 51-10 Payments received under a grant made by the Australian-American Educational Foundation with the condition that the grant is from funds made available to the Foundation under the agreement establishing it.Also income from CRAFT scheme – Cth Rebate for Apprentice Full-time Training.
Sec 51-15 Official salary and non-Australian sourced income derived by Governor General or State Governor. But still assessable on ordinary and statutory income derived from source in Australia.
Sec 51-25 Mining payments paid to Aboriginals or distributing bodies are exempt (they are subject to mining WHT under Div 11C Pt III (36 Act))
Sec 51-30 Periodic maintenance payments, rental subsidy payments and open employment incentive bonus are all exempt from tax.
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Sec 51-45 Mining payments to Aboriginals or distributing bodies are exempt.
Sec 51-48 Refunds of State or Territory business franchise fees are exempt if subject to Cth franchise fees windfall tax.
Sec 51-49 Refunds of State taxes paid on Cth places are exempt from tax if subject to Cth places windfall tax.
Overseas Employment IncomeSec 23AG(7) “Foreign Service”:
Means service in a foreign country as the holder of an office or in the capacity of an employee.
Sec 23AG Foreign earnings derived after 30/6/87 by an Australian resident engaged in service in a foreign country for a continuous period of not less than 91 days are exempt, PROVIDING: Foreign earnings are not exempt from tax in foreign country; and If there is foreign tax liability, the Commissioner is satisfied that it has
been paid or will be paid.
Sec 23AG(2) Exceptions:Sec 23AG will not apply if the income is exempt from foreign tax solely because: Of a DTA The foreign country does not tax employment income; or A law or agreement dealing with diplomatic privileges and immunities
applies.
IT 2441
Sec 23AG(6)
Sec 23AG(6A) to (6E)
Continuous service:Services period of 91 days does not have to be measured on a year of income basis, can overlap year-end.
Continuity will not be broken by absences due to accident or illness. Absences on recreation leave does not break it either. EXCEPT where leave is: Attributable to employment other than the foreign service; LSL or similar kind Leave w/o pay or on reduced pay.
Provides method to calculate ‘absentee credits’ to determine whether taxpayer has satisfied the 91 day continuity service period. PLS 1-163
Sec 23AG(3) Sec 23AG amounts considered when calculating tax payable:The amount of foreign employment income exempt from tax will be taken into account in calculating Australian tax payable on other assessable income. [Ref: PLS 1 –163 for formula]
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Sec 23AG(4) Formula given apportions the deductions between the exempt and non-exempt income. NOTE: superannuation deductions and fees paid to prepare Australian tax returns are NOT apportionable deductions: Norris v. FCT; TD 200/12.
Foreign branch profitsSec 23AH Foreign branch profits derived by an Australian company from a branch
carried on in a comparably taxed country exempt. Applies to both income and capital gains.Conditions: Income derived by the taxpayer during the year of income
commencing 1/7/90 or subsequent year Foreign income is derived carrying on a business in a listed country or
through a permanent establishment in the listed country Broad-exemption listed country – PLS 1 -166 Foreign income is subject to tax in any listed country in a tax
accounting period.
Non-portfolio dividendsSec 23AJ Non-portfolio dividends paid to a resident company by a company in a
listed or unlisted country to the extent that it is an ‘exempting receipt’ – exempt. NOTE: PLS 1 -170.
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ALLOWABLE DEDUCTIONS
GST ImplicationsSec 27-1 to 27-30 Exclude GST from deductible amounts to extent of entity’s ITC
entitlement or decreasing adjustment (s27-5). Deduction for increasing adjustments due to changes in creditable
purpose of the acquisition (other than for adjustments relating to an increased use of the item for private or domestic purposes) (sec 27-10)
Deduction for increasing adjustments on cessation of entity’s GST registration as long as the assets is still held for income-producing purpose (s27-10(3)).
Exclude GST from amounts considered in calculating deductions Deny deduction for GST payments (s27-15) Exclude ITC entitlements from outgoing incurred before 1/7/00.
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Business DeductionsSec 8-1(1) You can deduct from assessable income any loss or outgoing to the extent
that: It is incurred in gaining or producing assessable income (all
taxpayers); or It is necessarily incurred in carrying on a business for the purpose of
gaining or producing assessable income (business taxpayers)
Sec 8-1(2) You cannot deduct a loos or outgoing to the extent that: It is a loss or outgoing of capital, or of a capital nature; It is a loss or outgoing of a private or domestic nature; It is incurred in relation to gaining or producing exempt income; A provision prevents you from deducting it.
FCT v. Snowden & Willson Ltd
Necessarily Incurred:Necessarily incurred does not mean that the outgoing must be unavoidable or logically necessary. It means clearly appropriate or adapted for the ends of business. It is depended upon the exercise of reasonable commercial judgement.
FCT v. James Flood Pty Ltd
FCT v. Raymor (NSW) Pty Ltd
New Zealand Flax Investments Ltd v. FCT
Coles Myer Finance Ltd v. FCT; TR 97/7; TR 94/26
FCT v. James Flood Pty Ltd
Coles Myer Finance Ltd v. FCT
Incurred:It is not necessary for an actual disbursements to have been made for a liability to be incurred. All that is required is that the taxpayer is definitively committed, or has completely subjected itself to, the expenditure. Even though the amount cannot be precisely determined as long as it is capable of reasonable estimation. (also RACV Insurance Pty Ltd v. FCT)
Actual payment of an amount during the year will result in the amount being ‘incurred’ in that year.
Does not include expenditure which is no more than impending, threatened or expected.
Where taxpayer has not physically discharged the liability, the amount will still be incurred provided: There is a presently existing liability; The loss or outgoing which arises as a consequence of that liability is
of a revenue character; and All or part of the loss or outgoing is properly referable to the
particular year in question.
An amount may be incurred even though the debt is defeasible.
The expense should be properly referable to the revenue – ie. the period of time during which the benefit from incurring the loss or outgoing is put to profitable advantage.
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Lunney v. FCT
Ronpibon Tin NL; Fletcher & Ors v. FCT
AGC; Placer Pacific; TR 2000/D3
FCT v. Brown
TR 2000/D3; Steele’s case
Commr of IR (NZ) v. Europa Oil (NZ) Ltd
Nexus with Assessable Income:Outgoings must have the ‘essential character’ of an outgoing incurred in the process of deriving assessable income.
Outgoing must be ‘incidental & relevant’ to gaining assessable income.
Outgoings after business has ceased: In order for the outgoing to be deductible, the occasion of the outgoing must be found in those income earning activities (ie. is the loss still incurred in relation to the income earning activities? Taxpayer bound to pay liabilities after the fact which arose due to the activities)
Where taxpayer incurred unavoidable costs arising out of transactions entered into in the course of business, these costs will still have the necessary nexus after the business has ceased.
Outgoing before business commences: Outgoings and losses will be deductible provided: They were not incurred ‘too soon’, ie. not preliminary to the income
earning activities Expense is not private or domestic Period of outgoings prior to derivation of relevant income is not so
long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and income is lost.
Expense incurred with the view of gaining or producing assessable income
Continuing efforts are undertaken in pursuit of that end.
The Commissioner’s concern is only that the necessary nexus to the production of income exists. As long as it exists, it is irrelevant that it was extravagant or could have been done in a less costly manner. The Commissioner must accept the decisions made by the taxpayer even if the expenses were incurred with poor judgement.
British Insulated & Helsby Cables Ltd v. Atherton
NAB Ltd v. FCT
Sun Newspaper Ltd v. FCT
Capital Nature:Enduring Benefit test: if an expenditure is made once and for all and with a view of bringing into existence an asset or an advantage for the enduring benefit of a trade, it will be capital.
Once and for all test: capital expenditure is a thing that is going to be spent once and for all. Income expenditure recurs every year.
Business entity test: Expenditure in establishing, replacing and enlarging the profit yielding structure is capital. There needs to be 3 elements: The character of the advantage sought – is it a fixed capital asset or an
enduring benefit for the organisation or profit earning subject that is sought? Or is it in the nature of circulating capital, turned over or consumed in running the business?
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The way in which the asset or advantage is used – is it an element in the profit yielding structure or part of the profit earning process?
How was it acquired – by capital or revenue payments.
Mansfield v. FCT; FCT v. Edwards
Jayatilake v. FCT
Private or Domestic Nature:Need to look at the ‘essential character’ of the expenditure. Expenses which appear to be essentially private in nature, may be deductible if it is excessive or occasioned by the specific working conditions o the taxpayer.
Child minding expenses by employee or self-employed person is a private and domestic cost.
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Some Specific Items Deductible Under s8-1Travel Expenses
Payne v. FCT
S26-30
S26(3)
Case R2 84 ATC
Case R13 84 ATC
Allowed deduction for travel if part of the business is conducted at the taxpayer’s residence and travel is from that place to another place where the business is being carried out.
Deduction denied for accompanying relative unless: During the trip , the relative performs substantial duties as employee
of the taxpayer, or, the taxpayer’s employer It is reasonable to conclude that the relative would still have gone on
the trip even in the absence of the personal relationship with the taxpayer
Where expenses are incurred in providing a fringe benefit, they are deductible in full
Costs can be apportioned on a marginal basis, rather than 50/50
Trips partly for pleasureProper method is to determine the degree of predominance to be attached to the objects or purposes in the pursuit of which the taxpayer incurred the particular expenditure which is the subject of the apportionment.
Trading stockS8-1, s70-15 Deductible under s8-1, however is not allowable until the income year
that the taxpayer has taken the trading stock into account as stock on hand or the year in which the taxpayer includes an amount in assessable income in connection with the disposal of stock.
Interest Expenses
Sec 8-1
Ure v. FCT; TR 95/25
Purpose of the borrowing:Interest may be deductible where funds have been applied for purpose of gaining or producing assessable income or the borrowing is necessarily incurred in carrying on a business to produce assessable income.(if the outgoing for which interest was incurred is deductible, then interest is deductible)
The test of deductibility requires looking at the essential character of the interest. Look at: Character of taxpayer’s undertaking or business; Objective purpose of the borrowing; Nature of the transaction or series of transaction of which the
borrowing of funds is an element Subject purpose (sometimes)
Sec 8-1; IT 2661 Apportionment required:Where borrowing used partly for income producing purposes, the interest expense is deductible only to the extent to which the funds have been used for that purpose.
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TD 93/13 Choice of property used for security irrelevant:Interest incurred on loan to acquire an income producing property is fully deductible even though loan is secured over non-income producing property – eg. family home.
Travelodge Papua New Guinea Ltd v. Chief Collector of Taxes
Steele’s case
TR 2000/D3
Acquisition of income producing property:Interest on money borrowed to construct an income producing asset is deductible even when interest is paid during construction period and no revenue is received. BUT there must be no doubt that the asset is being constructed solely and exclusively for the purpose of producing assessable income.
Where funds have been used to acquire capital assets, the fact that the cost of the asset is not deductible under s8-1 does not mean that the interest is not deductible. If the asset is used for income producing purposes, the cost of the asset is capital, but the interest payments are recurrent revenue items.
Interest before income derived: Interest incurred in a period prior to the derivation of income will be outgoings incurred in gaining or producing assessable and therefore deductible if: They were not incurred ‘too soon’, ie. not preliminary to the income
earning activities Expense is not private or domestic Period of outgoings prior to derivation of relevant income is not so
long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and income is lost.
Expense incurred with the view of gaining or producing assessable income
Continuing efforts are undertaken in pursuit of that end.
Brown v. FCT; TR 2000/D3Where business ceases or asset is disposed of:If interest has been incurred over a period after the relevant borrowings or the relating asset has been lost, it will still be an outgoing ‘incurred in producing assessable income’ if the occasion of the outgoing is to be found in whatever was productive of the assessable income of an earlier period. This requirement is satisfied if: Funds were borrowed for an income earning purpose and not used
for any other purpose; and Taxpayer has no legal entitlement to repay the principal and as a
result, is saddled with an unavoidable stream of interest outgoings.
IT 2661; FCT v. Carberry Asset for private and business use:If an asset is acquired which has both income producing and private use, then interest cost still wholly deductible if taxpayer can demonstrate that private funds have been used to meet the cost of the private component, ie. the borrowings relate solely to the part of the asset acquired for business use.
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FCT v. JD Roberts; FCT v. Smith
Borrowing to repay partnership capital (refinancing principle):Where a partnership is carrying on a business, if the partnership borrows to refund partnership capital to the partners (where capital represents moneys originally advanced by the partners, undrawn profit distributions, loans to the business) interest on the borrowings will be deductible. HOWEVER, interest will not be deductible if the borrowing is used to replace partnership capital which is represented by internally generated goodwill or an unrealised revaluation of assets as they do not represent refund of moneys previously invested.
Ure v. FCT; Fletcher v. FCTInterest on borrowings exceeds return on investment:If borrowing is partly for purpose of producing income and partly for non-allowable purposes, can apportion by limiting the taxpayer’s deduction for interest to an amount equal to the amount received from his investment of the borrowed money.(eg. if rent property out to relatives at below arm’s-length price, then interest deduction is only limited to the proportion of investment you get from your loan, ie. apportion the deduction to the rent you now receive).
IT 2678
Sec 67AAA
Interest on borrowing to make superannuation contributions:Interest incurred by an employer in borrowing funds to make super contributions to provide benefits for its employees is deductible.
Financing costs (incl. interest) re loans or other financing arrangements entered into after 18/8/92, where moneys were used to make super contributions otherwise than on behalf of employees not deductible.
IT 2606 Interest on borrowings to fund share acquisition:There must be a connection between the incurring of the interest and: Activities of taxpayer which do or are expected to produce
assessable income; OR Business of taxpayer being a business carried on for purpose of
earning assessable income.
IT 2582 Interest on borrowings to pay tax:Deduction is only available to business taxpayers. There is a connection between carrying on the business and borrowing the money.
FCT v. Marbray Nominees Pty Ltd.
Penalty interest payments:Penalty interest for early repayment of loan is deductible if the penalty interest has been paid to alleviate the obligation to pay interest on part of the loan.
Sec 25-5(1)(c) Interest payments to the ATO:Interest charged by the ATO under s170AA (interest where assessments are amended to increase tax payable) and s207A (interest for late payment of tax) is deductible from 1/7/92
Ilbery’s case Prepayment for interest denied where the dominant purpose was to
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reduce tax and for no other purposeDamages and Penalties
Herald & Weekly Times v. FCT
Damages and costs incurred were inseparable from the income producing activity and the thing which produced the assessable income was the thing that exposed the taxpayer to the liability which was discharged by the expenditure – therefore deductible.
Magna Alloys Pty Ltd v. FCT
Damages and penalties paid in connection with the way the business is conducted is deductible.
Sec 26-5 Prohibits deduction for any penalty or fine imposed by law.
Payments and Benefits provided to employeesSec 8-1 Salary and Wages:
Salaries or wages, bonuses, gratuities, allowances or other compensation or rewards for personal services paid is deductible to the extent to which they are incurred in producing the taxpayer’s assessable income.
Sec 8-1
Sec 25-50
Retiring allowance:A retiring allowance, whether in lump sum or pension form and whether paid to an employee or associates, is deductible ONLY if it can be shown to be in the future interests of the business (eg. to promote greater efficiency or economy in the carrying on of the income producing activities).
Pensions, gratuities or retiring allowances paid to employees or dependants are deductible IF they are paid in good faith in consideration of the employee’s past services.
Sec 26-35Excessive remuneration:If taxpayer makes a deductible payment to a relative or to a partnership in which he/she is a partner, the taxpayer can only deduct a reasonable amount.
S26-10Long service leave, annual leaveDeductible allowed for the year that the payment is MADE, not when the provision is raised.
Merrill Lynch InternationalDirector’s fees and bonusesDiscretionary bonuses are not incurred until a quantifiable legal liability to pay them to individual employees has arisen, even though there was not real doubt that some sort of bonuses would be paid.
Foreign Exchange LossesSec 8-1
Sec 82Z
Foreign exchange loss is deductible when realised and if incurred in producing assessable income AND the amount is not of a capital nature.
Forex losses of a capital nature may be deductible under Div 3B, Part III (ITAA 97). Currency exchange loss incurred by a taxpayer in a year of income
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under an eligible contract is an allowable deduction in that year of income.
Expenses on Commencement and Cessation
Softwood Pulp & Paper case
Establishment:Expenses associated with the purchase or establishment of a business generally incurred too soon to be regarded as being incurred in the course of business – not deductible.
Sec 25-50
Cessation:Payments incurred in closing down business not deductible.
Retirement payments made as compensation on closing down of business not allowed under s8-1 but may be under s25-50 if made in good faith and in consideration of past services of employee.
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Deductions Under Specific ProvisionsRepairs
Sec 25-10(1)
Sec 25-10(2)
Can deduct expenditure incurred for repairs to premises or plant which was held or used solely for purpose of producing assessable income.
Can only deduct expenses to the extent that it relates to the property or plant being held or used for income producing purposes.
TR 97/23
W Thomas & Co Pty Ltd v. FCT
What is ‘repair’?Ordinary meaning taken to be to ‘restore to good condition, to renovate or mend by replacing or refixing parts.Involves restoration of a thing to its former condition w/o changing its character.Involves restoration of the use and function of the item, not just appearance. Item does not need to be in serious state of disrepair – repairs can be undertaken in anticipation of defects.It only replaces a part of something which is already there but has been worn out.
Repair involves restoration of a thing to its former condition without changing its character.
TR 97/23
Lindsay v. FCT; Rhodesian Railways Ltd v. ITC; WG Thomas & Co Pty Ltd v. FCT
Repairs of capital natureRepairs will be of capital nature if: Expenditure is incurred in establishing, replacing or enlarging the
profit-yielding structure Expenditure is for work that is a renewal in the sense of a
reconstruction of the entirety. Initial repairs.
A repair which constitutes replacement of the entirety is not a repair.
FCT v. Western Suburbs Cinemas Ltd
Improvements:Improvements go beyond restoration of original use and function of item and so are NOT repairs. If enhances the item beyond original function and use, then improvement. Key factors:a) whether thing replaced or renewed was major and important part of
the structure of the plant, premisesb) whether work done did more than meet need for restoration of
efficiency and functionc) whether thing was replaced with new and better one;d) whether new thing has considerable advantages over the old one,
including advantage that it reduces likelihood of repair bills in future.
Law Shipping Co .v IRC; Initial repair:
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WG Thomas & Co Pty Ltd v. FCT
Odeon Associated Theatres v. Jones
TD 98/19
Where item subjected to a repair is acquired in condition that requires repair prior to use is considered as part of the cost of acquisition, not a cost of maintenance. [NOTE: informal ATO measure of initial repair is repair done within 12 months of acquisition.]
IF, expenditure incurred for initial repairs where repairs are effected subsequently to an item in workable but poor condition – deductible. BUT if incapable of being put to commercial use without immediate repair, then capital.
Initial repair expenditure may be included in the cost base of the asset for CGT purposes under s110-25(5) or 110-55(2).
TR 97/23 Notional repairs:Repair does not necessarily change because it is carried out at the same time as an improvement. BUT need to reasonably quantify the costs.
IT 180; TR 97/23Repairs after cessation of use:Expenditures on repairs carried out to premises, plant, etc after cessation of a taxpayer’s business is deductible, PROVIDED:a) need for repairs can be related to period during which the property or
item was used for purpose of producing income;b) property or item had been used for purpose of producing assessable
income at some time during the year in which expenditure was incurred.
Payment for non-compliance with a covenant to repairSec 25-15 Can deduct amount paid for failing to comply with lease obligation to
make repairs to premises which you use for producing income.Conditions to be satisfied: taxpayer must be obliged under the terms of a lease by covenant to
make repairs to premises. Taxpayer must have failed to comply Taxpayer must pay an amount as a consequence of failing to comply Taxpayer must have used or use premises for income producing
purposes.
Bad DebtsSec 25-35(1) Can deduct a debt written off as bad in the income year if:
The debt is written off in the income year in which the deduction is claimed; AND
The bad debts have been brought to account by the taxpayer as assessable income of any year; OR
Debts are in respect of money lent in the ordinary course of taxpayer’s business of money lending.
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Point v. FCT; GE Crane Sales Pty Ltd v. FCT
Conditions: Debt must have existence, as a legal or equitable claim. Must be ‘bad’. Must be written-off in the year claimed.
TR 92/18 When is a debt ‘bad’?a) when debtor has died, leaving no or insufficient assets to satisfy debtb) where debtor cannot be traced and creditor does not know any assets
against which action can be takenc) debt is statute-barred and debtor is relying on this defence for non-
paymentd) debtor is company – it is in liquidation or receivership and there are
insufficient fundse) on an object view of facts or probabilities existing at the time, there is
little or no likelihood of debt being recovered.
Point v. FCT Written off:Debt must be physically written off as bad during the year when it becomes bad. No need for formal writing off, but some form of written particulars are required. Not sufficient for debt to be recorded as bad when preparing yearly accounts.
Sec 20-30 Recoupment of bad debt:Any recovery of amounts written off as bad debts in a previous year must be included in the taxpayer’s assessable income.
Sec 165-120 Change of ownership: If debt incurred in earlier year – coy has same owners and control
throughout the period from day on which debt was incurred to end of income year in which it writes of debt as bad.
If debt incurred in current year – same owners and same control during the income year both before and after debt incurred.
If fail the test, can go to same business test (sec 165-129(2)).
Borrowing costsSec 25-25(1) Expenses incurred in borrowing money for income producing purposes
are deductible over term of loan or 5 yrs, whichever is shorter (per s25-25(5)).
S25-25(3) Apportionment:If borrowing is only used partly for purpose of producing assessable income, the deductible amount is based on proportion of funds used for income producing purpose.
Sec 25-25(4) Method statement:For working out the maximum amount you can deduct in one year (ref pg 2-80)
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Sec 25-25(6) Cost less than $100 per year:If borrowing expenses incurred in any one year does not exceed $100, they are deductible in that year.
PLS 2-81 Accounting treatment of Expenses of BorrowingMortgage Discharge Expenses
Sec 25-30
TR 93/7
Payments (not principal and interest) incurred to discharge a mortgage given as security for moneys borrowed are deductible as long as either the money or the property purchase was used for income-producing purposes.
Expenses incurred in discharge of a mortgage would include penalty interest for early repayment of loan.
Sec 25-30(3)Apportionment:Where money or property was only partly used to produce income, the deduction will be apportioned.
Expenses relating to lease documentsSec 25-20 Outgoing incurred in connection with:
Preparation of lease; Registration or stamping of lease; Assignment or surrender of leaseAre deductible PROVIDED the leased property was used for income producing purposes.
Sec 25-20(a) & (b) Apportionment:If leased property partly used for income producing purposes, apportion the deduction.
Expenses relating to granting of patentsSec 68A Expenditure in connection with obtaining or seeking to obtain grant of a
patent, registration of a copyright or design, extension of term of a patent or registration period for a design – deductible, PROVIDED that the patent, copyright or design is used for assessable income producing purposes.
Pensions, Gratuities and Retiring AllowancesSec 25-50
Sec 25-30(3)
Sec 26-55
Allows deduction for amounts paid by taxpayer as pensions, gratuity or retiring allowance to an employee, former employee or their dependants. BUT only deductible if payment made in good faith and in consideration of employee’s past services in the business carried on for the purpose of producing assessable income.
Section will not apply if some other provision applies to allow deduction, eg. s8-1.
Deduction under s25-50 not allowed if it will result in the taxpayer carrying forward a tax loss.
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Tax related expensesSec 25-5(1) Can deduct expenditure relating to:
Managing tax affairs Complying with an obligation imposed by a Cth law re tax affairs of
an entity Interest under s170AA – underpayment of tax or s207A – late
payment of tax.
TD 2003/10 Tax consolidation expenditureHead company can deduct valuation feesConsolidation fees are deductible under s25-25
SubscriptionsSec 25-55
TR 2000/17
Can claim a deduction for subscriptions to a trade, business or professional association where section 8-1 does not apply.Claim is limited to a max. of $42.
If you can claim under s8-1, it is not limited to $42. This will also not count towards your $42 limit.
Costs associated with meeting GST obligationsDivision 27 Effect of GST on tax deductions:
Exclude GST from deductible amounts to extent of entity’s ITC entitlement or decreasing adjustment (s27-5).
Deduction for increasing adjustments due to changes in creditable purpose of the acquisition (other than for adjustments relating to an increased use of the item for private or domestic purposes) (sec 27-10)
Deduction for increasing adjustments on cessation of entity’s GST registration as long as the assets is still held for income-producing purpose (s27-10(3)).
Exclude GST from amounts considered in calculating deductions Deny deduction for GST payments (s27-15) Exclude ITC entitlements from outgoing incurred before 1/7/00
TR 1999/12
Sec 25-80
What is deductible:Some expenses incurred in preparing for GST are deductible as revenue outgoings, eg. stationery, professional advice, staff recruitment and training. The cost of software and other plant such as computers are depreciable (unless the expenditure is <$300 or effective life is <3 years, which means immediately deduct).
Small to medium sized businesses (ie. turnover <$10m) that are registered for GST before 1/7/00 are entitled to an immediate deduction for the cost of acquiring or upgrading plant or software between 1/7/99 and 30/6/00 to meet GST obligations. Must be installed and ready for use before 1/7/01.
Legal Expenses PLS 2 -66S25-25 Certain borrowings of money –deductible
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S25-30S25-20S86A
Discharging of certain mortgagesPreparation of leasesGrant of registration or extension of patents, designs and copyrights
Hallstroms Pty Ltd
Magna Alloys & Research Pty Ltd v. FCT
Need to consider the reason for which the legal expenses were incurred (not the end result – eg. may put you out of business, but if it was incurred to defend something arising out of day to day operations, then deductible).
Need to ID the advantage for which the expenditure incurred and the manner in which it is to be relied upon or enjoyed.
Magna Alloys & Research Pty Ltd v. FCT
John Fairfax and Sons Pty Ltd v. FCT
FCT v. Snowden & Willson Pty Ltd
TR 2000/5
Capital or Income?Legal expenses which arise out of activities in the ordinary day to day business operations will generally be on revenue account and deductible under s8-1.
Where expenses relate to the profit yielding structure of the business, the outgoings will be capital in nature and not deductible.
Even where the legal fees arise because of an unusual set of circumstances, if they relate to the manner in which the business is conducted, they will be deductible.Expenditure incurred to vindicate business methods is properly to be regarded as being on revenue account.
Legal costs re hiring staff and establishing employment agreements are deductible, UNLESS it is part of setting up the business. Outgoing for legal expenses in resolving employment disputes are deductible.
Gifts, PensionsDivision 30 (97); s78 (36) All taxpayers can deduct individual gifts of $2 or more made during the
year to certain nominated funds, institutions or bodies or classes of them.
Sec 30-15
FCT v. McPhail
Conditions: Gift must not be made by will Gift must be $2 or more (in money or property) If property is given, must have been purchased by taxpayer <12
months before gift is made AND the deductible amount is the lesser of the cost price of the property or its value at the time it is given.
Recipient of the gift must be in Australia (incl. Norfolk, Cocos and Christmas Islands).
The property must be transferred voluntarily to the donee and not as a result of any contractual obligation and the transferor must not receive by way of return any advantage of a material character.
Sec 30-200 Valuation of property gift:Valuations must be in writing and must state the estimated value of the property at the time the gift was made OR provided that the valuation is made within 90 days of gift, the value at time of valuation.
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Sec 30-15 National Heritage:Gifts of property of National Heritage significant made to National Trust bodies are deductible in same way as gifts of art.HOWEVER, the property must be listed in Register of National Estate at time gift is made and is accepted by the National Trust for the purpose of preserving the property for benefit of the public.
Sec 30-15, item 3; TD 92/114
Sec 30-15, item 3
Political parties:Deduction allowable for gift to a Registered Political party as long as the taxpayer is not a company. This includes membership subscriptions.
Annual limit for deductions for political party donations is $100.
Loss on Disposal or Redemption of traditional securitiesSec 26BB(1) Definition:
Security acquired after 10/5/89 that is not trading stock and under which the total payments, other than periodic interest, will not exceed issue price by more than 1.5%.
Sec 70B(2) Where taxpayer disposes of a traditional security or redeems it, the amount of any loss on disposal or redemption is deductible.
Sec 70B(3)
TR 96/14
Non-arm’s length disposal/redemption:The Commissioner may deem the consideration for the disposal to be equal to market value.
In determining arm’s length consideration, a discounted cash flow analysis will be used where there is no established market from which the arm’s length value can be ascertained.
Debt/Equity SwapsSec 63E(3) Where taxpayer has outstanding debt due from debtor which is a
company, trading trust or public unit trust, an allowable deduction may arise where taxpayer agrees to extinguish debt in return for non-redeemable shares or units in debtor. Deduction is allowable for the swap loss where the debt is greater than the equity value of the shares or units.[NOTE: debt forgiveness issues]
Payments to Related EntitiesSec 26-35 Where business makes payment to a related entity, taxpayer only
permitted to deduct so much of amount as the Commissioner deems reasonable. IF amount is not deductible here, it will neither be assessable income or exempt income in hands of recipient: s26-35.
Sec 26-35(2)(b) What is a related entity?A relative of taxpayer, or ptsp in which a relative of the taxpayer is a partner.
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Sec 995-1 or s6(1) For a person: The person’s spouse Parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal
descendant or adopted child The spouse of listed persons
For a partnership: Relative of a partner Director/shareholder of a company that is a partner Relative of a director/shareholder of a coy that is a partner Beneficiary of a Trust that is a partner or a relative of such B Another ptsp if partner in this other partnership is a relative of a
partner in the first partnership.
Loss by Theft or EmbezzlementSec 25-45 Deduction allowed for theft, stealing, embezzlement, larceny, defalcation
or misappropriation by agents or persons employed by taxpayer, where: There has been a misappropriation of money, not property Money must have been included in taxpayer’s assessable income Losses have been sustained through employees or agent other than an
individual you employ solely for private purposes; or Deduction only available once loss has been ascertained.
Expenditure on Research and DevelopmentSec 73B(10) Deduction to eligible companies re expenditure on eligible R&D
provided: Coy is registered under s39J of Industry R&D Act 1986 re activities; Coy is registered under s39P of same act re projects comprising or
including R&D activities.
Sec 73B(1) Definition of R&D
Sec 73B(2C) Exclusion of certain activities as R&D activities
Sec 73B(14)
Sec 73B(14A)
Deduction factor:If total R&D expenditure exceeds $20,000, the deduction acceleration factor is 125% for eligible R&D expenditure incurred after 20/8/96.
Interest incurred after 23/7/96 in financing R&D activities is deductible at 100% and not 125%.
Sec 8-1 Deduction under s8-1Expenditure on R&D may be deductible under s8-1 if it is both relevant and incidental to the income producing activities of the business and is not of a capital nature (eg. high-tech industries or R&D on products which are trading stock of business).
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Mains Electricity ConnectionSubdiv. 387-E Deduction allowable for capital expenditure in connecting mains
electricity to a property on which a business is carried on or in upgrading existing connection to such property – for 97/98 & subsequent years.
Sec 387-355 Deduction is allowable in equal instalments over 10 years.
Sec 387-360 Expenditures which are qualifying expenditures:Refer p4-37
Loss from Profit-Making Undertakings or PlansSec 25-40(1)
Sec 25-40(2)
Deduction for loss arising from the carrying on or carrying out of a profit-making undertaking or plan IF any profit from the plan would be included in the taxpayer’s assessable income.
EXCEPTION – cannot deduct if loss arises in respect of sale of property acquired after 20/9/85.
Superannuation ContributionsSec 82AAC(1) Where:
a) a taxpayer makes a contribution to a fund for the purpose of making provision for super benefits payable for an eligible employee; AND
b) the fund is a complying superannuation fundthe amount is deductibleNOTE: the contributions must actually be made, cannot be merely set aside.
Environmental Impact ExpenditureSec 400-15(1)
Sec 400-15(2)
Deduction for expenditure incurred in carrying out an environmental impact activity ‘for the sole or dominant’ purpose of evaluating the impact on the environment.
CANNOT deduct expenditure incurred for purpose of determining economic feasibility of project.
Sec 400-20(1) Limits on deductibility: no deduction allowed for expenditure which are deductible under
another provision of the act no deduction allowable for expenditure taken into account in
calculating depreciation deductible under Div. 42.
Environmental Protection ExpenditureSec 400-55 Deduction for expenditure incurred for sole or dominant purpose of
carrying on an environmental protection activity.
Sec 400-65(1) Non-deductible amounts – ref p 4-47
Sec 400-60 What is “Environmental Protection Activities”? – ref p 4-47
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Commercial Debt Forgiveness[Refer to Companies section for Companies debt forgiveness]Sec 245-25 What is a commercial debt?
Commercial debt if interest payable on the debt is, was, or will be an allowable deduction to the debtor.Where interest is not payable, the debt will be commercial debt where, had interest been charged, it would have been deductible.
Sec 245-35
Sec 245-40
When is debt forgiven?A debt is forgiven if the debtor’s obligation to pay the debt, or any part of it, is released or waived or is otherwise extinguished.5 circumstances where there is commercial debt forgiveness:1) forgiveness by release, waiver or extinguishment of debt2) forgiveness where recovery of debt is statute barred3) in-substance forgiveness 4) forgiveness arising from debt parking5) forgiveness arising from in substance debt-for-equity swaps
DOES NOT APPLY if forgiveness effected under will or an Act relating to bankruptcy or for reasons of love and affection
Sec 245-75(1) What is the gross forgiven amount?Gross forgiven amount = Notional Value – Consideration.[Refer p 2-104 for explanation of each value]
Sec 245-85 Net forgiven amount:Reduce gross forgiven amount by: amount that has been or will be included in debtor’s assessable
income amount by which a deduction that would otherwise be allowable has
been, or will be, reduced; and amount by which the cost base of any asset of the debtor is reduced.
Div 245-105 Application of net forgiven amount to reduce:“Net forgiven amount” of a commercial debt can be applied, in order, to debtor’s ‘reducible amount’: deductible revenue losses per s2450-110 deductible net capital losses of prior years before forgiveness year per
s245-125 ‘deductible expenditure’ eg. scientific research, Australian films per
s245-140 cost bases of certain assets per s245-165
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Non-Deductible ExpensesExpenditure related to a capital gainSec 51AAA Where expense would not have been deductible but for the capital gain
being included in assessable income, the expense is not an allowable tax deduction.
Taxes, charges, penalties or finesSec 26-5
Sec 26-20
Sec 26-60
Sec 26-65
Sec 51(8)
Sec 51(9)
Penalties and fines payable under the law of the Cth, a State or Territory, an authority of one of these or a foreign country are not deductible.
Charges related to HECS are not deductible except where HECS payments constitute the provision of a fringe benefit: s26-20(2)
Superannuation Contributions Surcharge not deductible
Termination payments surcharge not deductible
Late lodgement component of levy charged for Superannuation Supervisory Levy not deductible.
Deduction not allowable for Superannuation Guarantee Charge.
Club Fees and Expenditure Relating to Leisure FacilitiesSec 26-45(1) Taxpayer cannot deduct outgoing if incurred to obtain or maintain,
whether for the taxpayer or someone else: membership of a recreational club; or rights to enjoy facilities provided by a recreational club for the use or
benefit of its members.
Sec 26-45(2) What is a recreational club?Company established or carried on mainly to provide facilities, for the use or benefit of its members, for drinking, dining, recreation or entertainment.
Sec 26-50(1) Taxpayer cannot claim deduction for costs to: acquire ownership of a leisure facility or boat; or acquire retain ownership of a leisure facility or boat; or acquire rights to use of a leisure facility or boat; or retain rights to use of a leisure facility or boat; or use, operate, maintain or repair a leisure facility or boat; or in relation to any obligation associated with ownership of a leisure
facility or a boat; or in relation to any obligation associated with right to use a leisure
facility or a boat.
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Sec 26-50(2).
Sec 26-50(3)
Sec 26-50(5)
What is a leisure facility?Land, building or part of a building or other structure, used for holidays or recreation.
EXCEPT: if at all times during the year, the facility is held: for sale in ordinary course of business of selling leisure facilities; or mainly to provide it:
in ordinary course of business of providing leisure facilities for payment; or
produce income in nature of rents, lease premiums, licence fees or similar charges; or
for employees to use; or for care of employee’s children.
EXCEPT: for a boat, deductions available, if at all times during year, it is: held as trading stock in ordinary course of business; used mainly for letting it on hire in ordinary course of business; used mainly for transporting for payment in ordinary course of
business; used for a purpose that is essential to the efficient conduct of a
business carried on by taxpayer.
Entertainment ExpensesSec 32-5 If outgoing or loss is incurred in respect of providing entertainment, it is
NOT deductible under s8-1.
Subdiv. 32-B
Sec 32-20
EXCEPTIONS:Some entertainment expenses may be deductible if they come under an exception: Refer p 4-59.
Where entertainment expenditure is incurred in providing fringe benefits, it is fully deductible.DOES NOT apply to the extent that the taxable value of FB is reduced under s63A of the FBTAA.
Sec 32-10(1)
TR 97/17
What is entertainment:a) entertainment by way of food, drink or recreation; orb) accommodation or travel to do with providing entertainment by way
of food, drink or recreation. It will still be entertainment even if business discussions or transactions occur.
Factors to consider:a) why is the food and drink being provided? If for purpose of
refreshment, then not entertainment. If provided in social situation, then entertainment
b) what food and drink is being provided? Biscuits for coffee or tea vs. hot sit-down meals
c) when is the food or drink being provided? If provided during work
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IT 2675
time, overtime or while travelling, less likely to be entertainment.d) Where is the food or drink being provided? On employer’s business
premises, usual workplace of the employee OR some function room, hotel, restaurant?
Where employee travelling in the course of performing employment duties and consumes food and drink, the food and drink provided without any supplementary entertainment is NOT entertainment.
Light meals are not within the entertainment provisions if only sandwiches or other ‘hand food’, salads, orange juice are provided and consumed on taxpayer’s premises.
Sec 32-15 Property used for entertainment:Where property used for purpose of, or in connection with, the provision of ‘non-deductible entertainment’, property will be taken as not being used for purpose of producing assessable income to the extent it is provided for entertainment.
Sec 32-75 Safeguard provision:Where:a) a taxpayer incurs loss under an arrangement;b) someone provides entertainment under the arrangement to the
taxpayer or someone else; andc) s32-5 would have prevented loss being deductedthe taxpayer will be treated as if he/she had incurred the loss in providing the entertainment to the extent that the Commissioner thinks reasonable. This means that taxpayer cannot deduct these costs.
Employee car expensesSec 51AF Expenses paid by employee after 1/7/86 re cars provided by employers for
their own use where there is an entitlement to use the car for private purposes are NOT deductible.
Expenses incurred by employees will be considered in determining the taxable value of the car FB.
Travel expenses of an eligible relativeSec 26-30(1)
Sec 26-30(2)
Sec 26-30(3)
No deduction for travelling costs of a relative of a person where the relative performed none or minor duties as an employee or the relative would not have travelled but for the relationship with the employee.
UNLESS:a) relative, while accompanying the taxpayer, performed substantial
duties as an employee of the taxpayer or taxpayer’s employer and it is reasonable to conclude that the relative would still have accompanied the taxpayer even if he/she had no personal relationship with the taxpayer
b) Expenditure is incurred in providing a fringe benefit (ie. covering travel expenses of relative.
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Employee car parking expensesSec 51AGA Not allowed deduction for car parking expenses where car is used to
commute from home to work and is parked near employee’s main workplace for more than 4 hours between 7am and 7pm.If one of the conditions are not met, then deduction allowed.
Reimbursement of employee’s expensesSec 51AH Where an expense payment fringe benefit is provided to a person (other
than reimbursement of car expenses on the cents per km basis), the amount of deduction is reduced by the amount of payment or reimbursement.
Sec 51AJ Deduction denied to employee for his contributions to the private element of a benefit subject to FBT.
Non-cash business benefitsSec 51AK Where:
A taxpayer incurs ‘expenditure’ under an agreement Under the same agreement, a non-cash business benefit is provided to
the taxpayer or another person; and The non-cash business benefit is not exclusively for use or application
for the purpose of producing assessable income of the taxpayerThe deductible expenditure is reduced by the arm’s length value of the ‘non-cash benefit’.
Occupational ClothingDiv. 34 Expenses incurred by employees not deductible in relation to non-
compulsory corporate wardrobes or uniforms unless design of the uniform is entered on the Register of Approved Occupational Clothing at the time the expense was incurred.
Limits on certain deductionsSec 26-55 Imposes a limit on the amount of certain types of deductions to ensure
they do not generate or increase losses for taxpayers. Deductions are: Pensions, gratuities and retiring allowance per s25-50 Gifts or contributions per Div. 30 Promoters recoupment tax per s78B Development allowance for leasing companies Super contributions of self-employed persons and unsupported
employees per s82AAT Drought investment allowance for leasing companies.
Self Education expensesSec 82AA The first $250 of your claim for self-education expenses is not deductible.
TR 98/9 The $250 must be expenses of self-education, but need not be deductible under the general deduction provisions.
Expenses that are deductible under provisions other than s8-1 are also taken into account in the s82A calculation.
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Anti-Avoidance provisionsSec 82KJ Losses and outgoings incurred under certain schemes whereby a taxpayer
or his associate acquired property are denied where: Outgoing was incurred after 19/4/78 under a tax avoidance agreement Amount of loss was greater than amount that could reasonably be
expected to have been incurred at the time had there been no agreement
Property has been or will be acquired by the taxpayer under the agreement
Consideration payable in respect of the property was less if the outgoing had not been incurred.
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Employment DeductionsSec 8-1; FCT v. Wilkinson It is not necessary for employee to show that the expenditure was incurred
as an express or implied condition of employment. It will NOT be deductible if: Amount is preparatory to earning income and does not arise in the
course of earning income; Amount is capital in nature It is private in nature It is domestic.
TR 98/14 Where an expense allowance is provided:If the allowance is not assessable because it is subject to FBT, no deductions is available to the employee for expenses covered by the allowance.
Specific Deductible ExpensesEmployment AgreementsTR 2000/5 The following costs are deductible:
Costs of drawing up employment agreement with existing employer to replace an award or in accordance with provision in existing agreement.
Costs associated with settlement of disputes arising out of existing employment agreement
Providing existing agreement allows for change – costs of changing the conditions of agreement with same employer.
Cost of renewing, extending a fixed term agreement which has a provision allowing for renewal or extension at end of term.
Not deductible: Costs of drawing up employment agreement with new employer Re-employment with an employer following termination of a fixed
term employment agreement which has no provision for renewal or extension, costs of drawing up an employment agreement.
Business association subscriptionSec 8-1 Union dues and other periodical subscriptions to trade, business or
professional associations are generally deductible under s8-1 as long as the association’s services have a direct nexus to the derivation of taxpayer’s income.
TR 2000/7 Deductible: Membership subscriptions – where principal activities of association
are relevant to taxpayer producing or gaining assessable income. Levies and other contributions – as long as the purpose for which they
are made is clearly linked to activities by which taxpayer earns income.
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Not deductible: Joining fees Payments to, or to assist, a political party; Payments to provide overseas relief Payments to assist families of employees suffering from financial
difficulties as result of employees being on strike or having been laid off
Payments by elected salaried trade union officials into a general fund for election of officials.
Clothing and LaundrySec 8-1 Deduction allowable if for buying, renting, laundering, dry-cleaning,
repairing and replacing clothing which are protective, occupation specific, compulsory or registered.
TR 94/22
TR 97/12
When is it deductible:See whether the clothing expenditure has the ‘essential character’ of an outgoing incurred in gaining or producing assessable income.
Conventional clothing – not deductible (unless the specific nature of your job requires you to purchase excessive quantities of it – FCT v. Edwards. The deduction would be the cost above what you would otherwise have incurred).
Occupation specific clothing – deductible Protective clothing – deductible Compulsory uniform/wardrobe – deductible Non-compulsory uniform/wardrobe – only deductible if satisfies
requirements of Div. 34, ie. must be registered but not enforced to wear.
TR 98/5 Laundry:Claim deduction for washing, drying or ironing clothes which are: Compulsory uniform/wardrobe Non-compulsory uniform/wardrobe Occupation-specific clothing; or Protective clothing.
Home office expenses
TR 93/30Home office v. home study:Factors: The area is clearly identifiable as a place of business The area is not readily suitable or adaptable for use for private or
domestic purposes in association with the home generally The area is used exclusively or almost exclusively for carrying on a
business The area is used regularly for visits of clients or customers Was the home office set up for employee’s convenience, ie. is there an
alternative place of work available for taxpayer to conduct her business? Swinford’s case.
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TR 93/30 Where it is a home office:The taxpayer can claim: Interest on home loan, rent, house insurance, rates calculated on floor
area basis. Heating, lighting – additional to regular home use. Depreciation, insurance, repairs on relevant equipment, desks, chairs,
bookshelves, curtains, floor covering, fluorescent lighting system Cleaning costs, pest control on floor area basis. Maintenance and decorating.
NOTE: if home is place of business, then CGT will apply to gain or loss arising when the home is disposed of to the extent that it was used to produce income.
Handley v. FCT; FCT v. Forsyth
When it is a home study:Cannot claim deductions under s8-1 for mortgage, interest, house insurance, rent or rates.
Can claim only for additional running costs of the house: Deduction for heating/cooling and lighting expenses incurred as result
of taxpayer’s income-producing activities. repairs to the premises which are of a non-capital nature as an
expense.
Self-education expensesSec 8-1; TR 98/9 Self-education expenses are deductible under sec 8-1 where the expenses
have the necessary connection with the production of the taxpayer's assessable income.
TR 98/9 What is self education expenses? Tuition or course fees (attending educational institution; conferences
or seminars) Textbooks, professional and trade journals, technical instruments and
photocopying Depreciation of items of plant or article – eg. computers, calculators Airfares for overseas study tours or sabbatical, for work-related
conferences or seminars or to attend educational institution. Accommodation and meals whilst taxpayer is away from home
overnight Interest on moneys borrowed to fund the above.
FCT v. Hatchett; Finn; Smith
Connection with production of income: The cost of acquiring knowledge is never an outgoing of capital (FCT
v. Hatchett) Expenses incurred in keeping up to date or to better enable the
taxpayer to discharge existing duties or to earn present income may be deductible (Finn (1961)).
Where a new or further qualification is sought, there must be at least a high degree of probability that it will lead to an increase of earnings if the cost is to be deductible (Hatchett).
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However, the qualification need not necessarily have to give rise to an increase in salary (Smith). It will not be sufficient simply to establish that the employer has encouraged the employee to undertake the self-education. If the taxpayer is not currently occupied or employed in an area which makes the study necessary or desirable, it seems that the cost is not deductible.
TR 98/9
TR 92/8
TR 98/9
Deductions:Allowable deduction where: Relevant connection to taxpayer’s current income earning activities If income earning activities are based on some skill or specific
knowledge and the object of self-education is to maintain or improve the skill or knowledge, then deductible
If it leads to or likely to lead to, an increase in taxpayer’s income – deductible
Motor vehicle expenses will be self-education expenses if incurred in travelling between: Home – educational institution – home Work – educational institution – work Home – educational institution (no) – work Work – educational institution (no) – home
Not deductible: No deduction is allowable for self-education expenses where the study
is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (even in the taxpayer's present employment) (FCT v. MI Roberts)
cost of meals purchased by a taxpayer while attending a course at an educational institution unless the taxpayer is required to sleep away from home.
HECS payment per s26-20 Expenditure on accommodation and meals where taxpayer travelled to
another location for self-education and has established a new home.
Section 82A
TR 98/9
Limits on deduction: A deduction is not available in respect of the first $250 of certain
kinds of self-education expenses. HOWEVER: Deductions for expenses that do not come within the
definition of ''expenses of self-education'' and deductions under other specific deduction provisions will count in the $250.
Motor Vehicle Expenses
FCT v. Collings; FCT v. Wiener; Gaydon v. DFCT
Travel between home & work:Generally not deductible even where: Travel allowance received; Incidental tasks are performed en route Travel is outside normal working hours; Involves a second or subsequent trip.
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MT 2027 Will be deductible when: Travel to client’s premises and then to work (but employer has a
regular place of employment and travels to it habitually; in the performance of duties of employment, travel is undertaken to an alternative destination which is not a regular place of employment; journey is undertaken to location at which employee performs substantial employment duties).
Carrying bulky equipment to work when it is requirement that equipment be stored at home (FCT v. Vogt)
Where employment starts prior to leaving home (FCT v. Collings)
Itinerant Traveller:If nature of work of taxpayer is itinerant, then travel from home to work deductible, ie.: Travel is fundamental part of employee’s work Employee has no fixed place of work Employee continually travels from one site to another.
Superannuation ContributionsSec 82AAT Contributions by an eligible person deductible when:
Contributing to complying super fund or RSA to obtain super benefits for person or dependants of person in event of death;
Written notice in approved form provided to fund trustees or RSA provider stating intention to claim deduction and has received acknowledgment.
Sec 82AAS Who is an eligible person?Self-employed or substantially self-employed or employee who does not receive any employer super support.
Maximum allowable deductionThe lesser of: The first $5000 plus 75% of excess (for 2002/03 years the base
amount was $3,000) Aged base limit
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PrepaymentsSec 82KZM
Sec 82KZL
Any taxpayer incurred deductible expenditure under an agreement entered into after 25/5/98 but before 21/9/99 in return for services of any kind which were not to be wholly provided within 13 months of date of expenditure then timing rules will apply to the deduction of the prepayment
For section to apply: Prepayment must relate to doing of a thing NOT done within 13
months Amount is not excluded expenditure and Deduction would have been allowed under s8-1 but for this section.
What is excluded expenditure: Less than $1,000 Required to be paid by court order or law Salary and wages Amount which is capital, or private or domestic in nature.
TD 93/118 When s82KZM applies:Deduction is spread across period of service on days basis. Ie:Expenditure x (No. of days of Eligible Service Period in expenditure year / total no. of days in Eligible Service Period)
Sec 82KZL(2) Eligible service period:Details of periods for interest, rent or lease payments and insurance premiums – ref. P 4-101
Sec 82KZMB
Sec 82 KZMD
For businesses OTHER THAN small business taxpayers:Where Eligible Service Period is UP TO 13 months:Taxpayer may deduct the sum of:Expenditure x (No. of days of Eligible Service Period in expenditure year / total no. of days in Eligible Service Period)ANDA proportion of the later year amount using transitional rules as per s82KZMB(5) – refer p 4-103
Where Eligible Service Period MORE THAN 13 months:For each year, taxpayer may deduct:Expenditure x (No. of days of Eligible Service Period in expenditure year / total no. of days in Eligible Service Period)
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Sec 960-335; 960-350Prepayments by small business taxpayers:Small business taxpayers include persons or entities with an average annual turnover of less than $1m
Prepayments made by small business taxpayers or non-business taxpayers for a thing to be done within 13 months of date of expenditure is deductible in the year in which the expenditure is incurred.
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Depreciation and Capital WorksS40-25(1) You can deduct an amount equal to the decline in value for an income
year of a depreciating asset that you held for any time during the year: Must be a ‘depreciating asset’ Must be ‘held’ by the taxpayer Must be used for a taxable purpose or must be installed ready for use
for that purposeS40-25(7) Taxable purpose
Purpose of producing assessable income Purpose of exploration or prospecting Mining site rehabilitation Environmental protection activities
Sec 40-40 HeldPLS 6-2
Sec 42-15 You can deduct depreciation of a unit of plant if:a) you are its owner or quasi-owner; andb) you use it, or have it installed ready for use, for the purpose of
producing assessable income.
Yarmouth v. France
J Lyons & Co Ltd v. The Attorney General
Wangaratta Woollen Mills Ltd v. FCT
Sec 42-18
TD 93/159
Plant or Articles:Plant or articles does not include any part of the setting or environment within which the income producing activities are carried out. Distinguish the apparatus used for carrying on income-producing operation (plant) from items merely functioning as part of general setting for the income-producing activities (not plant)
See whether item relates to setting in which business is carried on or part of the apparatus used for carrying on the business.
Is the item in the nature of a tool which plays an integral part in the production process?
Defines ‘plant’ – refer pg 5-2 & 5-3 Unit of Plant:For depreciation purposes, item is treated as a separate unit of plant if: it is regarded as a whole in itself; capable of being separately identified; has a separate function of its own.
Sec 42-100(1)
Sec 42-105(1)
What is the effective life of the plant?Must either: work out effective life of plant; or adopt the effective life specified by the Commissioner for plant under
s42-110 (individual rate determined by Commissioner as required).
Work out effective life by estimating how long it can be used by any entity for income producing purposes – do it at time of first use or
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Sec 42-105(2)
IT 2685
Sec 42-105(3)
TD 93/189
Sec 42-112(1)
Sec 42-112(3)
Sec 42-112(4)
Sec 42-112(5)
Sec 42-112(2)
installed ready for use.
In making that estimation, assume: plant is new (NOT for plant acquired after 21/9/99) subject to wear and tear at rate you think reasonable looking at your
circumstances of use will be maintained in reasonably good order and condition.
FACTORS in estimating effective life: plant’s potential physical life; predictable obsolescence; taxpayer’s particular circumstances of use technical information – eg. manufacturer’s specification whether effective life restricted by duration of project taxpayer’s or other users’ own past experience with similar plant.
If it is likely that the plant will be scrapped or sold for scrap for abandoned before end of the effective life, then the effective life ends at the earlier time.
If plant can readily be used for other income-producing activities at the end of the project, the effective life is not restricted to life of the project.
Re-estimation:For plants acquired POST 21/9/99: can re-estimate up or down in the first income year if you conclude that the effective life has changed due to changed circumstances.BUTEffective life cannot be re-estimated if plant is subject to accelerated depreciation rates.
Examples of changes in circumstances where you will need to re-estimateRef pg. 5-12
Work out new estimated life as per usual.
New effective life starts to apply for the income year for which you make the choice.
Sec 42-65
Sec 42-75Sec 42-90
Sec 42-80Sec 42-70
What is the cost of plant?Method statement – refer pg 5-4
Adjustments to cost:After cost has been determined, may need to adjust due to: plant being acquired under non-arm’s length transaction another taxpayer has previously claimed depreciation deductions for
the plant cost of car > car depreciation limit cars acquired at discount under certain schemes to avoid car
depreciation limit
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Sec 42-85Sec 42-82
part of plant’s cost is deductible under some other provision lessor is treated as quasi-owner under s42-312 acquires plant under a
sale and leaseback agreement
Sec 42-80
Sec 42-70(1)
Motor Vehicle cost limit:Cost base of motor vehicle for purpose of calculating depreciation is held to an upper maximum limit – for 99/00 & 00/01, it is $55,134
Where the cost of the car must be increased, eg. when the car is acquired at a discount – ref p 5-9
Sec 42-25(1)Calculation of depreciation percentage:Annual % is calculated on basis of effective life of plant. Effective life can be based on Commnr’s guidelines or self-assessment of effective life.
Sec 42-125(1)
Sec 42-120(2)
Sec 42-160(3)Sec 42-165(2A)
Rate of Depreciation:Pre 21/9/99 plant:There are general rates for plant acquired between 27/2/92 an 21/9/99 which can be used
Must choose rate of depreciation to be used for the income year in which a depreciation deduction is first allowable to the taxpayer.
Post 21/9/99 plant:Depreciation rates determined by reference only to effective life of plant:Diminishing value rate = 150% / effective life (in years)Prime cost rate = 100% / effective life (in years)
For small taxpayers:Entitled to usee accelerated depreciation rates for plant acquired after 21/9/99 (NO ONE ELSE can) as long as conditions in s42-345(1) are met.Refer p 5-14.
General Depreciation RatesFor Plant Acquired Between 26/2/92 and 21/9/99 (for post 21/9/99, see above)
For small taxpayers: Applies to plant acquired before & after 21/9/99Description Section Depreciation Rate
Reference Prime Cost Diminishing Value
Items which cost more than $300 acquired before 1/7/00 acquired by small business taxpayer up
to 2001
42-167100%100%
100%100%
Items used for scientific research acquired before 1/7/95, AND: which have an effective life of at least
5 years; or are an eligible motor vehicle or
42-145
33% 50%
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eligible artwork
Items used for providing employee amenities: which have an effective life of at least
5 years
42-150
33% 50%
Years in effective life: fewer than 3 3 to fewer than 5 5 to fewer than 6 2/3 6 2/3 to fewer than 10 10 to fewer than 13 13 to fewer than 30 30 or more
42-125 100%40%27%20%17%13%7%
N/A60%40% 30%25%20%10%
Sec 42-25(3)
Sec 42-160(1)
Sec 42-165(1)
Sec 42-160(3)
Sec 42-160(2A)
Methods of depreciation: prime cost method diminishing value/reducing balance method.
Where plant acquired: after 26/2/92 but before 21/9/99; or after 21/9/99 by small business taxpayersDiminishing value method:[(Opening Undeducted cost x Days owned)/365] x Diminishing value rate
Opening undeducted cost = undeducted cost of plant on first day of income year on which you were its owner or quasi-owner.Days owned = no. of days in income year you were owner or quasi-owner
Prime cost method:[(cost x days owned)/365] x prime cost rate
Where plant acquired after 21/9/99 by non-small business taxpayersDiminishing value method:Opening undeducted cost x (days owned/365) x (150%/Effective life)
Prime cost method:Cost x (days owned/365) x (100%/Effective life)
Sec 42-170Apportionment of depreciation deduction:Where asset acquired during the year, depreciation calculation must be calculated for those days in year during which the asset was installed ready for use or used to produce assessable income.
Sec 42-105(1)
Disposal of Asset:[NOTE: generally, termination value = sale price – expenses of sale]Where termination value (s42-205 definition) < written down value:Can deduct an amount if the termination value of plant < undeducted cost
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Sec 42-105(2)
Sec 42-190(1)
Sec 42-190(2)
(depreciated value)
The amount you deduct is the difference between the two amounts.
Where termination value > written down value:Include in assessable income.
Amount of balancing charge to be included is the LESSER of: amounts that taxpayer has deducted or can deduct for depreciation of
plant amount by which termination value > WDV
Sec 42-285(2)
Sec 42-290
Balancing Adjustment Relief:Taxpayer may choose to have the balancing charge deducted from:1) the cost of any replacement items;2) the cost of other depreciable items acquired in year of disposal; then3) the WDV of other selected depreciable items of plant held at
beginning of year. BUT only available for all taxpayers for disposals BEFORE 21/9/99For disposals after 21/9/99, only available to small business taxpayers or some involuntary disposals.
Balancing adjustment can be offset against replacement plant if acquired within 2 years of end of income year during which the balancing adjustment event occurred.
GST related expensesSec 42-168
Sec 25-80(1)
Expenditure incurred by small and medium sized businesses on acquiring plant for purposes of implementing GST is immediately deductible provided following conditions are met: plant was acquired during 1/7/99 to 30/6/00 one of the reasons for acquisition was to meet obligations of business
or exercise of its entitlements under the GST law has pre-GST annual turnover of <$10m registered for GST before 1/7/00 before 1/7/01, was owner or quasi owner of plant and use it or have it
installed ready for use for purpose of producing assessable income.
Plant upgrades:Expenditure entirely deductible if conditions above satisfied.
Computers Hardware and SoftwareDiv 46 Allows depreciation deduction over 2.5 years for expenditure incurred in
acquiring, commissioning or developing software after 11/5/98.
Sec 46-65Immediate deduction for software:Total expenditure on acquiring, developing or commissioning software is $300 or less provided total cost of all purchases of identical software does not exceed $300 in a year.
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Sec 46-70
Sec 46-70(1)
Sec 46-75
For software projects (commissioning or developing in-house) which are abandoned before software is used or installed ready for use.
For the abandonment, can deduct if: incurred expenditure with intention of using software for purpose of
producing assessable income; and expenditure relates to unit of software that you have not used or had
installed ready for use; and in current year, you have decided that you will never use the software,
of have it installed ready for use the expenditure is not in your software pool.
Expenditure incurred before 1/1/00 on software or in substantially rebuilding current software provided that the principal purpose was to ensure Y2K compliance.
Sec 46-35
Sec 46-40
Sec 46-45
Sec 46-55
Depreciation of software:The prime cost method must be used
The effective life of software is 2.5 years
The depreciation rate is 40%
Balancing adjustment even occurs if the software permanently ceases to be used or installed ready for use.
TR 2000/D6Development of website:Cost of acquiring, developing or constructing a website is ‘expenditure on software’ under Div 46.Depreciable over 2.5 years over a period where the website is used as part of a commercial venture carried on for the purpose of producing assessable income.
Alterations to website represent acquisition of additional software if new functions are introduced. Ongoing operating expenses of commercial websites are allowable deductions.
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Deductions for Capital WorksSec 43-10(2) For a capital works to be deductible:
the capital works must have a ‘construction expenditure area’; there must be a ‘pool of construction expenditure’ for that area; and the taxpayer uses the taxpayer’s capital works area in a deductible
way.
Sec 43-20 What sort of capital works? Buildings (building, extension, alteration or improvement) begun in
Australia after 21/8/79 or outside Australia after 21/8/90 Structural improvements (extensions, alterations or improvements) –
eg. sealed roads, driveways, carparks, airport runways, bridges, pipelines, tunnels, retaining walls, fences, dams, artificial sports field; and earthworks integral to construction of structural improvement
Environment protection earthworks
Sec 43-75 Construction expenditure area:For capital works begun after 30/6/97: Part of capital works which the CE was incurred that, at time it was
incurred, was to be owned or leased by entity…For capital works begun before 1/7/97: Part of capital works on which CE was incurred that, at the time it was
incurred, it was owned or lease by entity…and At time of completion of construction was to be used in way described
in Column 3 of Table s43-90.
Sec. 43-85 “Pool of CE”So much of the CE incurred by an entity on capital works as is attributable to the CEA.
Sec 43-15(1)What is deductible?A portion of your construction expenditure. BUT cannot exceed the amount of undeducted construction expenditure.
Sec 43-25(1)
Sec 43-25(2)
What is the rate of deduction?For post 26/2/92 capital works, rate of deduction is: 2.5% for capital works used in a deductible way, eg. for purpose of
producing assessable income; 4% for capital works used in the “4% manner”
For pre 26/2/92, rate of deduction is 4% for capital works used in deductible way if capital works started after 21/8/84 and before 16/9/87.
In other cases, rate of deduction for pre 27/2/92 is 2.5%.
Sec 43-210How is deduction calculated?Construction expenditure x Applicable rate x (Days used/365)
“4% manner”:
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Sec 43-145 Table under section – applies only to capital works that are buildings started after 26/2/92. Ref. P 5-27
Sec 43-70(2) “Construction Expenditure”Indicates what is NOT construction expenditure – ref. Pg 5-28.
Sec 43-40(1)
Sec 43-250
Destruction of capital works:Amount is allowable as capital works deduction if all or part of the capital works is destroyed, PROVIDED: Taxpayer is eligible for deduction re capital works under Div. 43, Div.
10C (capex on traveller accommodation) or 10D (capex on some buildings and structural improvements)
There is an amount of ‘undeducted construction expenditure’ re the capital works; and
Taxpayer was using the capital works in a deductible way before the destruction.
Balancing deduction:Balancing deduction = Undeducted Construction Exp – amount received as result of destruction of capital works.
Business Related Cost – Blackhole ExpenditureSec 40-880 Establish a business
Covert an existing business structure to a different structure Raise equity for the business Defend the business against a takeover Conduct an unsuccessful takeover attempt Liquidation a company that carried on a business and of which the
taxpayer is a shareholder, or Stop carrying on a business
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Tax LossesSec 36-10 Tax Loss = Deductions (other than c/f losses) – Assessable Income – Net
Exempt Income
Sec 26-55 Restrictions:Gifts, pensions, gratuities or retiring allowances, promoters recoupment tax, certain superannuation contribution, drought investment allowance and development allowance (both to the extent that these allowances apply to a leasing company) CANNOT create or add to a tax loss.
Sec 36-20 Net exempt income:For residents:Total exempt income – Non capital losses incurred in deriving exempt income – Non-Australian taxes on exempt income.
For Non-residents:Australian sourced exempt income – excluded exempt income (defined in s36-20(3), ref pg. 7-2)– exempt income subject to WHT (per s128D)+ s26AG (film proceeds) exempt income – exempt income subject to WHT– non-capital losses incurred in deriving exempt income– non-Australian taxes on s26AG income.
Sec 36-15
Sec 36-15(5)
Sec 36-15(6)
Sec 36-15(7)
Sec 375-820
Deducting tax losses:How to use deductions – Ref to pg. 7-3
If have 2 or more tax losses, deduct them in order in which they were incurred.
Tax loss can be deducted only to extent that it has not already been deducted.
If cannot deduct all or part of your tax loss in an income year, can carry forward to the next income year.
If more than one class of loss incurred in one year, can deduct against future income in following order: film losses incurred in 89/90 and subsequent years (but only against
film income) primary production losses incurred before 89/90 year general domestic losses (includes primary production losses) incurred
in 89/90 and subsequent years.
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Foreign Income LossesSec 79DA
Sec 79D
Sec 160AFD(2) & (7)
Sec 160AFD
Sec 160AEA(1)
Sec 160AEA(2)
Domestic losses can be offset against foreign source income at choice of taxpayer.
Foreign deductions are quarantined against foreign source income of same class
Foreign income loss incurred after 1989 income year can be carried forward indefinitely for recoupment against assessable foreign income at a later year.
Foreign loss can only be applied against foreign income of same class. Foreign income categorised as: interest income modified passive income offshore banking income and all other assessable foreign income.
Passive income is: dividends, unit trust distributions, interest income, annuities, rental
income, royalties, assignment receipt, profits of capital nature, etcModified passive income is: Passive income excluding interest income.
Losses of Previous Years:Sec 165-10 Companies cannot deduct losses unless either:
a) it meets the conditions in s165-12 (same ownership test); orb) it meets the conditions in s165-13 (same business test).
Sec 165-12(2)
Sec 165-12(3)
Sec 165-12(4)
Sec 165-12(1)
Continuity of ownership test:To pass the continuity of ownership test: Voting power: there must be persons who had more than 50% of
voting power in company at all times during the ownership test period (test in s165-50)
Rights to dividends: there must be persons who had rights to more than 50% of the company’s dividends at all times during the ownership test period (test in s165-155)
Rights to capital distributions: there must be persons who had rights to more than 50% of the company’s capital distributions at all times during the ownership test period (test in s165-160)
NEED TO SATISFY ALL
Ownership test period:For income years after 21/9/99:Test period is the period from the start of the loss year to the end of the income year.
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Sec 165-15 For income years prior to 21/9/99:Test only had to be satisfied in both income and loss year, NOT intervening period.
Change in Control of voting power:Where: For some or all of the ownership test period that started at the end of
the loss year, a person controlled, or was able to control the voting power in the company;
For some or all of the loss year, the person did not control and was not able to control that voting power; and
Person began to control, or became able to control, that voting power for the purpose of getting some tax advantage.
If so, company CANNOT claim tax loss unless satisfy same business test.
Sec 166-5(2)
Sec 960-225(1)
Concessional Rules for listed public companies:Listed public company taken to have met conditions in s165-12 if there is substantial continuity of ownership of company between start of test period and each of these other times: Time of each abnormal trading in shares in the company; and End of each income year.‘Substantial continuity is the same as continuity of ownership test, ie. more than 50% of voting power, dividends and capital distributions.
Defines what ‘abnormal trading’ is – ref p 7-7
Sec 166-13
Sec 165-210(1)
TR 1999/9
Same Business TestThe company cannot deduct losses of previous years unless the same business test is satisfied, ie: The company must carry on the same business throughout the income
year as it did immediately before test of time; and Company must not, at any time during the income year, derive
assessable income from business of a kind that it did not carry on before the test time, or from a transaction that it had not entered into in the course of its business operations before the test time.
The company satisfies the same business test if throughout the same business test period, it carries on the same business as it carried on immediately before the test time. (refer to p7-9 – steps to work it out)
Test period: the period throughout the income from the time immediately before the change in ownership.
What is Same Business? Significant weight given to changes in income producing product or
service, how it is produced, acquired or provided and/or changes in the market
Mere existence of an intention or power to carry out certain business
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TR 1999/99
Sec 165-210(2)
activities irrelevant. Mere change in process by which business is carried on does not mean
the test is failed. Expansion or contraction of the business does not necessarily result in
change of business – therefore, organic growth through adoption of new compatible operations in the ordinary way, or discard of old operations may not fail test BUT sudden and dramatic change brought about by loss or acquisition of business operations on a considerable scale is likely to change the business
Discontinuance of a significant part of the business by cessation or sale or commencement or acquisition of new undertakings – may fail.
Where company’s activities have wound down to the extent that company is not in fact carrying on business
Continuity of name of company Continuity of location Existence of periods of dormancy, reasons and reasons for resumption Continuity of custom and goodwill
For a manufacturing business: Is there a change in product manufactured and how major is the
change? Ie. issue of a new model v. release of complete new product line.
Have any new business activities been commenced? What is the nature of any changes in the level of manufacturing? Ie.
outsourcing v. conversion of manufacturing business into one of assembling parts manufactured by others.
Are there changes to the market for the product? Are there changes to the turnover or gross assets of the company
attributable to various product Are there changes to the goodwill of the business? Are there any changes to the location of the business or its customers Are there changes in trade names, trade marks, patents, royalty
arrangements, etc – significant if the IP is significant
Additional Requirements to be satisfied to pass same business test New business test – company MUST NOT derive assessable income
from business of a kind it did not previously carry on New transactions test – company MUST NOT derive assessable
income from a transaction of a kind which it did not previously enter into in the course of its business operations.
Current year losses
Sec 165-35
Sec 165-40
Current year loss rules will apply if: The company does not pass the continuity of ownership test or the
same business test for the whole year; OR Person begins to control, or becomes able to control, the voting power
in the company where one purpose of obtaining that control is to get a tax benefit or advantage.
IF it applies, current year losses not considered when calculating taxable income.
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Sec 165-35When is there a change of ownership that will trigger the section?Rules will apply UNLESS: There are persons who had more than a 50% stake in the company
during the whole of the income year; OR There are persons who had more than 50% stake in company for first
part of year, but company satisfies same business test for rest of the year.
Same business test: Must carry on same business throughout balance of year as it did
immediately before the end of part of the year in which the 50% stake condition was satisfied; AND
Company MUST NOT, at any time during the balance of the year, derive assessable income from a business of a kind that it did not carry on before the test time, or enter into a transaction it had not entered into in course of its business operations before the test time.
Sec 165-25(1)
Sec 165-55
Calculation of taxable income:Method statement – pg 7-14
Attributing deductions – pg. 7-14
Transfer of Losses
Sec 170-5(1)
Sec 170-5(2)
Sec 170-5(3)
Sec 170-5(4)
Sec 170-5(5)
Conditions for grouping a loss:Transfer must be from one company to another company
Both companies must be members of same wholly-owned group.
Transfer must be ‘surplus’, ie. transferring company cannot use it as not enough income to offset it. The other company must have enough income to offset the transferred losses.
Neither company must be prevented from deducting the loss by Div 165 or 175
Tax loss transferred by an agreement between the two companies.
Sec 170-30(1)
Sec 170-30(2)
Sec 170-35(1)
Conditions for transfer of losses:Both companies must be in existence during at least part of each: The loss year; The deduction year; and Any intervening income year.
Both companies must be members of same wholly-owned group during whole or part of those income years when both were in existence.
Loss company must be: An Australian resident and not a prescribed dual resident; and Must not be a dual resident investment company in either loss year or
deduction year.
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Sec 170-40(1)
Sec 170-35(2)
Sec 170-35(3)
Sec 170-40(2)
The income company must be an Australian resident.
If loss year and deduction year are the same, it must be that the loss company was not required to calculated tax loss under: Sec 165-70 (change in ownership); or Sec 175-35 (injected income or deductions)
It must be that loss company would not have been prevented from deducting the tax loss in the deduction year itself if it had enough assessable income to offset it.
The income company must not be prevented by Div. 165 or 175 from deducting the transferred amount in the deduction year.
Subdiv. 975-W Wholly owned group:Two companies are members of a wholly owned group if:a) one of the companies is a 100% subsidiary of the other company; orb) each of the companies is a 100% subsidiary of the same third
company
Sec 170-45(1)
Sec 170-45(2)
Sec 170-55(1)
Sec 170-60
Amount that can be transferred:Amount transferred cannot exceed amount of loss company’s tax loss that, apart from the transfer, the loss company would c/f to next year.
Amount transferred cannot exceed amount which the income company can use.
If loss company has two or more tax losses that it can transfer in the deduction year, it can transfer them only in the order of them being incurred.
Income company cannot transfer a loss which was transferred to it.
Sec 170-50(1)
Sec 170-50(2)
Written agreement to transfer losses:Transfer must be made by a written agreement between loss company and income company.
Written agreement must:1) specify income year of transfer2) amount of tax loss being transferred3) signed by both public officers4) made on or before lodgement of income company’s ITR.
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TRADING STOCK
Trading StockWhat is trading stock?
Sec 70-10
All States Frozen Foods Pty Ltd v. FCT
Trading stock includes anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business AND livestock.
Items become trading stock when taxpayer is in a position to dispose of them.
Types of trading stock
TR 98/7
IT 333
Packaging Items: Items held by taxpayer trading in packaging items: whether as
manufacturer, wholesaler or retailer and whether or not the items are returnable packaging in hands of customer and taxpayer produces, manufactures or acquires items for sale in ordinary course of business – trading stock
Items held by taxpayer trading in goods other than packaging items: Trading stock if: Taxpayer is, or will be engaged in business trading in ‘core goods’
and Items are closely associated with core goods sold, ie. they form
part of the core goods or bring the core goods into the form, state or condition in which they are sold to customers; AND
Items are disposed of by the taxpayer in conjunction with sale of core goods.
Packaging items held for purpose of manufacture: packaging items held by taxpayer who carries on business as manufacturer and who obtains items for purposes of manufacturing other goods in ordinary course of business AND incorporate the items in the manufacture process – trading stock
Returnable packaging items: if held by taxpayer who engages in business trading core goods but who do not dispose of or pass property in the items to its customers – not trading stock.
Consumable Store:Items which are consumed in the manufacturing/maintenance process.Deductible when purchased – NOT trading stock. If spare parts – average life span is 2 years and claim deduction on
usage basis If store and consumables (eg. fuel and oil) – average life span is 3
months and deduct on purchase basis.
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TR 98/8
Guinea Airways Ltd v. FCT
Materials and Spare Parts:Trading stock if: Taxpayer is or will be carrying on a business providing services to
customers for reward; and Materials or spare parts are supplied by taxpayer to customer in the
course of, and as an essential part of, performing the service; and Materials or spare parts are separately identifiable things before and
after the services are provided which retain their individual character in nature, ie. not used up significantly
Materials and spare parts are disposed of to customer.
Generally, spare parts held for repair and maintenance are not trading stock.
St. Hubert’s Island Pty Ltd v. FCT
TD 92/124
Investment and Merchant Finance Corp. Ltd v. FCT
Land:Land can be trading stock in the hands of a property developer.
Single acquisition of land for purpose of development, subdivision and sale by business – trading stock. Acquisition does not have to be repetitive.To be trading stock, land must be: Acquired for resale; and Business activity which involves dealing in land must have
commenced.
Shares:If the taxpayer is a share trader, shares can be trading stock.
Trading stock – Assessable Income/Allowable deduction:Sec 70-35(1)
Sec 70-35(2)
Sec 70-35(3)
Sec 70-15
If you carry on a business, compare: Value of trading stock on hand at start of year; and Value of trading stock on hand at end of year.
Assessable income = Closing stock value – Opening Stock Value
Allowable deduction = Opening stock value – closing stock value
Timing of deduction: If item becomes part of trading stock before or during income year in
which outgoing is incurred, the outgoing is deductible in that year Otherwise, the outgoing is deductible in first income year in which
either: Item becomes part of trading stock on hand An amount is included in assessable income re the disposal of the
item.
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When Is trading stock ‘on hand’FCT v. All States Frozen Foods Pty Ltd
Farnsworth v. FCT
Sutton Motors
All States Frozen Foods
Gasparin v. FCT
TR 95/7
IT 2472
IT 2670
TR 97/15
Stock may be on hand even though taxpayer does not have physical possession. The stock on hand is that which has been delivered, or goods in transit provided title has passed to taxpayer.
Key test for whether stock is on hand is whether the taxpayer has dispositive power over the stock – ie. power to dispose of the stock. If the taxpayer has the power, then it is trading stock, this is even so if the power to dispose has been invested in an agent.
BUT even if the taxpayer stills owns the stock, if the power to dispose does not exist, it will not be ‘on hand’.
When item is held for sale or exchange, the fact that the taxpayer does not own it or has not paid for it, will not preclude the item from being stock on hand of the taxpayer.
Taxpayer who has property in stock, normally has the power to dispose of it.
Goods in transit will be stock on hand of taxpayer if the taxpayer has the power of disposal (also IT 2670)
Land: Land will remain trading stock on hand until settlement – it is then
that the seller finally loses all dispositive power and the contingency that the sale will not proceed is gone.
Lay-by sale agreement:Trading stock on hand of seller as seller still has possession.
Goods on consignment: where goods on consignment delivered to agent for sale on behalf of
consignor as principal – goods remain trading stock of consignor. Where goods are delivered to the consignee on approval, or on sale or
return, and the consignment involves sale of the goods to the consignee – goods are trading stock on hand of the consignee.
If an agent is used to dispose of stock on behalf of taxpayer, goods will still be stock on hand of taxpayer, even though agent has physical possession of the stock.
Conditional contracts:Conditional contracts are: Goods typically sold by seller to purchaser on basis that parties intend
that property in goods passes immediately to purchaser on delivery of goods;
Subject to the condition; That purchaser may return goods at any time in which case seller is
obliged to repurchase the goods.
Goods delivered to purchaser under conditional contract – purchaser
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has both property in and physical possession of the goods – trading stock on hand of purchaser.
Purchaser returns goods to seller before year end – property in and physical possession of goods back to seller – trading stock on hand of seller.
Trading stock valuationSec 70-40(1)
Sec 70-40(2)
Value of trading stock on hand at the start of the year is the same amount at which it was taken into account at the end of last year.
The value of trading stock on hand is nil if the item was not taken into account at the end of last year.
Sec 70-45(1)
Australasian Jam Co Pty Ltd v. FCT
Sec 46(7A)
3 bases of valuing trading stock:MUST elect to value each item of trading stock on hand at end of income year at: Cost; Market selling value; or Replacement cost.
Basis for valuation can change from year to year as long as the opening stock must equal the closing stock of the previous year. ALSO identical items can be valued using different methods.
Where it is evident that one of the company’s purpose in exercising an option to give a higher closing value to trading stock is to increase the inter-corporate dividend rebate, the Commissioner is authorised in calculating the rebate to calculate it as if an option to value the trading stock at the lowest possible value was exercised by the taxpayer.
GST implications:In working out the cost, market selling value or replacement cost of trading stock (other than an item which cannot be taxable supply) at end of year, disregard the ITC you would be entitled to if:a) you had acquired the item at that time; andb) the acquisition had been solely for a creditable purpose.
12 CBTR Case 19
Phillip Morris Ltd v. FCT
Cost Price Valuation:What is cost price?It is full absorption costing – includes purchase price as well as appropriate costs associated with bringing the stock into its existing condition and location (eg. freight, insurance, customs) – ref. 8-11
Methods of valuing stock at cost – refer pg 8-13
For manufacturers:Cost price is the amount expended in the course of manufacturing activities in order to bring the article into the state in which it was when it became part of trading stock on hand.
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IT 2350 The manufacturers will need to use a full absorption costing method if they choose the cost valuation method. There are 3 elements to be taken into account – material costs, direct labour costs and production overhead costs. (Refer pg 8-12 for examples)
Australasian Jam Co Pty Ltd v. FCT
Market Selling Value:Refer pg 8-13
the market selling value contemplates a sale in the ordinary course of business, not as a result of the most disadvantageous sale (eg. forced sale).
Parfew Nominees Pty Ltd v. FCT; TD 92/198
TD 92/198
Replacement Price:Only use if replacement items are in fact available in the market and these are substantially identical to the replaced item.
Replacement price is the amount which the taxpayer would have to pay in his buying market in order to replace a substantially identical item.
Trading Stock Issues:Sec 70-20 Non-arm’s length transaction:
If:a) a taxpayer incurs an outgoing that is directly attributable to buying or
obtaining delivery of an item of trading stock; andb) the taxpayer and the seller of the item did not deal at arm’s length; andc) the amount of outgoing is greater than the MV of the what the
outgoing is for,the amount of the outgoing is deemed to be MV for both buyer and seller (ie. for buyer – MV applies in s8-1 deductibility and cost of valuation; seller – included in assessable income).
DOES NOT apply if: transfer pricing arrangements apply item is not trading stock of buyer, even if it is for the seller outgoing incurred in buying or obtaining delivery is equal to or less
than MV; or cost of manufacturing or producing trading stock – section only
applies to buying or obtaining delivery of trading stock.
Sec 70-30(1)
Sec 70-30(5)
If you start holding as trading stock an item you already own:a) just before it became trading stock, the taxpayer is treated as if it had
been sold to someone else for whichever amount is elected: cost of item; or market value just before it became trading stock AND
b) the taxpayer immediately bought it back for the same amount.
EXCEPTION:Section does not apply if you start holding as trading stock: standing or growing crops; crop-stools
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Sec 104-220
Sec 70-110
trees planted and tended for salebecause they are severed from land.BUT, section WILL APPLY to the severed item that you later start holding as trading stock.
CGT Implications:As there is a deemed sale and repurchase, a CGT event K4 will arise and a capital gain will arise. Therefore, any pre-CGT property that is transferred into trading stock will now be treated as having been acquired post-CGT at time of deemed sale and re-acquisition.
Where item stops being held as trading stock:Where an item of trading stock stops being held by taxpayer as trading stock but continues to be owned by the taxpayer, the owner is deemed to have sold the item and re-acquired it at cost. (see below – disposal)
Sec 70-50 Obsolete stock:Can elect to value an item of trading stock below values in s70-45 if:a) there is obsolescence or other special circumstances in relation to the
particular item;b) taxpayer makes an election;c) value elected is lower than values under s70-45; andd) value elected is reasonable.
Livestock:Refer pg. 8-16
Disposal of Trading Stock
Sec 70-90(1)
Sec 70-90(2)
Sec 70-95
Case R85
Disposals NOT in the ordinary course of business: there is disposal by taxpayer of trading stock or of standing or growing crops, crop-stools or trees
planted and tended for sale; which are an asset of a business that is carried on by the taxpayer; and the disposal (actual, not deemed) was not in the ordinary course of the
business.The assessable income will include the MV of the item on the day of disposal.
BUT section does not apply if the item used to be trading stock or which was trading stock of a business which is no longer carried on.
Any amount actually received for disposal is not included in assessable income.
Implications for Acquiring entity:Deemed to have bought the stock at the market value
What is NOT ordinary course of business?Consider:
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nature of business being carried on what are normal transactions in the course of that business; and why this transaction is potentially outside the course of the business.
Sec 70-100(1)
Sec 70-100(2)
Sec 70-100(3)
Sec 70-100(4)
Sec 70-100(5)
Sec 70-100(6)
Sec 70-100(7)
Sec 70-100(8)
Partial change of interest in trading stock:Item of trading stock is treated as having been disposed of outside the ordinary course of business if it stops being trading stock on hand of the transferor and, immediately afterwards:a) the transferor is not the item’s sole owner; BUTb) an entity that owned the item immediately beforehand still has an
interest in the item.The effect is:a) transferor’s assessable income includes the MV of the item on the day
on which it ceases being trading stock on hand of transferorb) transferee is treated as having bought the item for the same value on
the day.
Election to NOT apply market values:Election can be made to treat item as having been disposed of for what would have been its value as trading stock of transferor on hand at end of income year, ending that day (ie. book value).
If election made, value is included in transferor’s income and the transferee is treated as having bought the item for same value.
Conditions for election: item has become, immediately after ceasing to be trading stock on
hand of transferor, an asset of a business carried on by the transferee; entity or entities that owned the property before the change hold at
least 25% of its market value (on day of change) in interest after the change
value elected is less than MV; and item is not a thing in action.
Election can only be made before 1/9 following end of relevant financial year.
Election must be in writing and signed by: entities that owned the item immediately before it stopes being trading
stock on hand of transferor; and entities that own it immediately afterwards.
Sec 70-105(1)
Sec 70-105(2)
Sec 70-105(3)
Devolution of Trading Stock on Death:Where person dies, MV of trading stock of person’s business is included in income derived by deceased owner up to date of death.
Person on whom the property devolves is deemed to have purchased it at MV.
Legal representative of deceased may elect to have include in assessable
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income the amount that would have been the value of the trading stock at the end of an income year ending on the day of death.
Sec 70-110Ceases to be Trading Stock:If you stop holding an item as trading stock, but still own it, you are treated as if:a) just before it stopped being trading stock, you had sold it to someone
else (at arm’s length and in the ordinary course of business) for its cost; AND
b) you had immediately bought it back for same amount. [ie. deemed disposal and re-acquisition at cost – the amount is included in assessable income of taxpayer]
Transitional Rules:Refer pg 8-23 (for trading stock ceasing to be pre 1/7/97)
Sec 70-115Insurance or indemnity for loss of trading stock:Assessable income includes amount:a) received by way of insurance or indemnity for loss of trading stock;
andb) not assessable as ordinary income under s6-5.
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CAPITAL GAINS TAX
What is a CGT Asset?Sec 108-5(1)
Sec 108-5(2)
Sec 108-7
TD 1999/D69
An asset is any kind of property or a legal or equitable right that is not property.
CGT assets are: part of, or an interest in, an asset referred to in subsec. (1) goodwill or an interest in it an interest in an asset of a ptsp interest in a ptsp that is not covered by above.
Joint tenants:Individuals who own CGT assets as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.
Know how:Know how is not a CGT asset.
Separate AssetsDiv. 108
Sec 108-80
TR 2000/31
Sec 116-40
TD 98/24
Refer pg 5-4 for list of separate assets
Improvements:To see whether capital improvements are related to each other, consider:a) nature of CGT asset to which the improvements are made;b) nature, location, size, value, quality, composition and utility of each
improvement;c) whether improvement depends on a physical, economic, commercial
or practical sense on another improvement;d) whether improvements are part of an overall projecte) whether improvements are of the same kindf) whether improvements are made within a reasonable period of time of
each other.
Multiple interests of taxpayer in the same CGT asset:Where different interests are acquired in the same asset on separate occasions – each interest remains a separate CGT asset, with a separate cost base and separately determined capital proceeds.
Allocation of capital proceeds:If asset deemed to be comprised of two or more separate assets, the capital proceeds should be apportioned between deemed separate asset.
Where parties are dealing at arm’s length, Commissioner will accept the allocation. In absence of agreed allocation, each party needs to make his/her own
reasonable apportionment. Need to have regard to and be able to justify, his/her reasonable apportionment based on relevant MV’s of
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separate assets at time of making contract. WDV of depreciable assets not necessarily their MV.
Personal Use Asset
Sec 108-20(2)
Sec 108-20(3)
Sec 108-10(2)
Sec 108-10(3)
Personal use asset is:a) CGT asset (except collectable) that is used or kept mainly for your (or
your associate’s) personal use or enjoyment; orb) An option or right to acquire a CGT asset of that kindc) A debt arising from a CGT event in which CGT asset in (a) was the
subjectd) A debt arising other than:
In the course of gaining or producing assessable income; or From carrying on a business.
DOES NOT include: Land, stratum unit or building or structure taken to be a separate CGT
asset.
Collectable is:a) artwork, jewellery, an antique, or a coin or medallion; orb) a rare folio, manuscript or book; c) postage stamp or first day coverthat is used or kept mainly for your personal use or enjoyment.
ALSO includes:a) interest in any of the things above;b) debt arising from above thingsc) option or right to acquire above things.
Sec 108-20(1)
Sec 118-10(3)
Sec 108-25
Sec 108-10(1)
Sec 108-10(4)
Sec 108-17
Capital gains/losses from PUA and collectables:Personal use assets:Capital loss from a PUA is disregarded.
Capital gain from a PUA is disregarded IF you acquired the asset for <$10,000 (exclude net ITC)
For cost base of a PUA, disregard the third element – non-capital costs of ownership
Collectables:Capital losses from collectables can be used only to reduce capital gains from collectables.
Unused capital losses from collectables can be applied in following year against capital gains from collectables exceeding capital losses from collectables.
For cost base of a collectable, disregard the third element – non-capital costs of ownership.
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Sec 118-10(1)
Sec 118-10(2)
Disregard capital gain or loss from collectable if you acquired for $500 or less (excluding net ITC).
HOWEVER, if collectable is an interest in:a) artwork, jewellery, an antique, or a coin or medallion; orb) a rare folio, manuscript or book; c) postage stamp or first day covercapital gain or loss made from interest disregarded only if MV of the asset (when you acquired the interest) is <$500.
Assets of Non-ResidentsDiv. 136
Sec 136-40
TD 2000/6
Liable for CGT if there is disposal or deemed disposal of asset with the necessary connection with Australia – refer p 5-12 for assets with ‘necessary connection’.
Non-resident becoming resident:Where taxpayer is individual or company, there are rules relevant to CGT assets owned just before becoming a resident, EXCEPT an asset: having the necessary connection with Australia; or was acquired before 20/9/85The first element of the cost base and reduced cost base (at time taxpayer became Australian resident) is MV at that time.
Non-resident bequeath:Where NR bequeaths a CGT asset which does not have the necessary connection with Australia to a resident beneficiary, the resident makes a capital gain/loss if a CGT event later happens to it.
CGT Events:Sec 104-5 Table of CGT events – refer p5-17
Which Entity Makes the Gains/LossesSec 106-35 Liquidation:
Acts done by liquidator of a company is deemed to be done by the company – so any capital gain/loss arises in the company.
Sec 106-50 Absolutely entitled beneficiaries:If beneficiary is absolutely entitled to a CGT asset as against the Trustee, an act done by the trustee in relation to the asset is deemed to be done by beneficiary – so any capital gains/losses goes to the beneficiary
Sec 106-60 Security holder:Act done by entity in relation to CGT asset for purpose of enforcing or giving effect to a security, charge or encumbrance held by entity over asset as if act was done by person providing the security – eg. bank sells house after property owner defaults on loan repayments, gain/loss made by owner.
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Timing of Acquisitions and Disposals:Refer to pg 9-14 for acquisition rules
Sec 109-5 (refer to table pg 9-14)
Compulsory acquisition:Acquisition is at the earlier of: when compensation was received; when acquirer became owner; when acquirer entered on the asset under powers conferred on the
person by relevant law; and when acquirer took possession under such powers.
Acquisition/Disposal under contract:Time of acquisition or disposal is the time of making the contract. Consider: taxpayer not required to report any capital gain or loss until an actual
change of ownership occurs, eg. at settlement when change in ownership takes place in later year, an earlier
assessment for the year in which the contract was made may have to be amended.
If contract is subject to a condition, it does not affect the time of the contract being made, unless it is a condition precedent to the formation of the contract – Case 24/94
Sec. 104-20(2) Lost or Destroyed:If asset lost or destroyed – disposal when an amount is first received by way of compensation. If no compensation, the time the loss was discovered or destruction occurred.
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CGT Exemptions and ConcessionsSubdiv. 118-A Exemptions
Sec 118-5(a)
Sec 118-5(b)
Sec 118-10(1) & (2)
Sec 118-10(3)
Sec 118-12
Sec 118-13
Sec 118-15
Sec 118-24
Sec 118-25
Sec 118-30
Sec 118-35
Sec 118-37(1)
Gains or losses on disposal are exempt for: A car, motor cycle or similar vehicle
Disposal of valour or brave conduct awards provided the disposer did not pay any consideration in respect of its acquisition.
Capital gain/loss from a collectable or interest in a collectable disregarded if acquired for $500 or less.
Capital gain from PUA disregarded if acquired for $10,000 or less (from 1/7/98 for assets acquired before or after)
Disposal of an asset used solely to produce exempt income
Capital gain or loss made from CGT even happening re shares in a PDF is disregarded.
Receipt of consideration in relation to the disposal of firearm under the ‘firearms surrender arrangements’
Capital gain/loss is disregarded if, at the time of the CGT event, the asset is:a) your plant; orb) if you are a ptnr, plant of the ptsp; orc) if you are absolutely entitled to the asset as against the trustee of a
trust (not regarding any legal disability), plant of the trustee.
Where asset disposed of was trading stock immediately before disposal.
Gain/loss from CGT event relating to interest in the copyright in a film is disregarded if:a) amount is included in assessable income under s26AG (about film
proceeds) b) an amount would have been included apart from s23H (about
exempting film proceeds).
Where amount received for results of R&D activities or for having incurred R&D expenditure.
Capital gain/loss made from CGT event is disregarded for: compensation or damages received for any wrong or injury suffered in
occupation compensation or damages for any wrong, injury or illness suffered
personally; gambling, game or competition with prizes…etc
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Sec 118-37(2)
Sec 118-40
Sec 118-42
Sec 118-45
Sec 118-55
Sec 118-60
Division 50
Capital gain as result of receiving an amount as reimbursement or payment of your expenses under one of these schemes: General Practice Rural Incentives Program Sydney Aircraft Noise Insulation Project M4/M5 Cashback Scheme.
Capital loss lessee makes from expiry, surrender, forfeiture or assignment of a lease disregarded IF lessee did not use lease solely or mainly for purpose of producing assessable income.
If:a) own land on which there is building;b) subdivide the building into stratum units; andc) transfer each unit to the entity who had the right to occupy it just
before the subdivisioncapital gain or loss from transfer of units disregarded.
Gain/loss from sale, transfer or assignment of rights to mine in area in Australia disregarded if you have exempt income for the whole year from the sale, transfer or assignment.
Gain/loss from contract you entered into solely to reduce risk of financial loss suffered from currency exchange rate fluctuations disregarded if contract relates to: liability you have to make payment under another contract; a CGT asset that is a right you acquire before 20/9/85 to receive
money under another contract.
Where person dies after 30/6/94 and disposes of asset under the Cultural Bequests programme
No capital deemed to have accrued if income of taxpayer for the year of income is exempt by virtue of a ‘relevant exempting provision’.
Main Residence ExemptionSec 118-110 Capital gains/losses from a CGT event relating to a CGT asset that is a
dwelling or the taxpayer’s ownership interest in it must be disregarded if certain conditions are satisfied.
Sec 118-190 Partial Exemption:CGT main residence exemption reduced if dwelling used for income-producing purposes for part or all of a period and interest on money borrowed to acquire the dwelling would have been deductible.BUT have to meet conditions: CGT event happens to a dwelling or the taxpayer’s ownership interest
in it. But for this section, the taxpayer would make a lesser capital gain/loss
than if Subdiv. 118-B had not applied, or would make no capital gain/loss from the event, because dwelling was the main residence of the taxpayer or of another person during a period.
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Dwelling was used for income-producing purposes during all or part of year
Taxpayer had incurred interest on money borrowed to acquire the dwelling or an ownership interest in it, such interest would have been deductible.
Sec 118-150 Deemed main residence:Dwelling can be deemed the main residence for a period prior to the dwelling actually becoming the main residence of taxpayer where: Taxpayer erects a dwelling on vacant land; Taxpayer completes the construction of a partly completed dwelling; Taxpayer demolishes a dwelling or partly erected a dwelling and
erects a new dwelling; or Taxpayer repairs or renovates a dwelling.The taxpayer can make an election which will extend for a maximum of 4 years, the time during which the taxpayer is taken to have used the dwelling as his/her main residence.
BUT for this to work, dwelling must become taxpayer’s main residence as soon as practicable after dwelling was erected AND continues to be so for at least 3 months.
Sec 118-140
Sec 118-140(2)
Change of residence:Where taxpayer owns two dwellings at time of changing homes both dwellings are taken to be main residence for limited period: Dwelling that was disposed of was the main residence of taxpayer for
continuous period of at least 3 months during 12 months before time of disposal
Dwelling not used for income producing purposes during that 12 month period, other than during period in which it was taxpayer’s main residence.
The period allowed for two main residences is maximum of 6 months.
Sec 118-145(1)
Sec 118-145(2)
Absences:Taxpayer can elect dwelling to be his/her main residence even though taxpayer has ceased to use it as such.Where there is NO election, dwelling will be subjected to CGT on pro-rated basis.Election may be made irrespective of period of time for which taxpayer ceases to use dwelling as main residence, EXCEPT where there is income-producing use, there is a 6 year limitation.
Sec 118-160 Destruction:CGT exemption where main residence accidentally destroyed and the taxpayer sells the land on which the dwelling was located, IF the taxpayer has not erected another dwelling on the land.
Sec 118-170 Spouse with different main residences:Taxpayer can nominate one of the residences as a main residence.BUT spouse cannot live separately on a permanent basis.
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Sec 118-170(3) & (4)
Sec 118-170(4)
If separate dwellings are nominated, can do if taxpayer has a 50% interest or less in the dwelling.
HOWEVER, if taxpayer or spouse has more than 50% interest in nominated dwelling, will be deemed to have had the dwelling as a main residence for half the period.
Sec 118-192 When main residence first used for income producing purposes:so that full exemption does not apply, the taxpayer will be taken to have acquired dwelling at that time for its MV.
Sec 118-195 Deceased estate:Gains and losses exempt for beneficiary or trustee of a deceased estate relating to a dwelling or taxpayer’s ownership interest in it IF: Taxpayer is an individual; Interest passed to taxpayer as a beneficiary, or taxpayer owned it as
trustee of estate Gain/loss arises out of one of the CGT events Certain conditions satisfied re use of property before and after death.
Conditions: If acquired PRE-CGT and the dwelling was main residence just before
death and was not then being used for producing income – taxpayer’s ownership interest will end within two years of deceased’s death.
If acquired POST-CGT and the dwelling was, from time of death until ownership interest ends, the main residence of: Spouse of deceased immediately before death; or An individual who had the right to occupy the dwelling under the
will; or Beneficiary who brought about the CGT event
The exemption will apply.
Reduction of capital gain otherwise assessableSec 118-20(1) Capital gain from CGT even reduced if, because of the event, a provision
of the Act (other than CGT part) includes and amount in: Your assessable income or exempt income; If you are a partner in a ptsp, the assessable income or exempt income
of the ptsp.Capital gain is reduced by the amount included in assessable or exempt income – cannot create a loss.
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Cost Base and Reduced Cost BaseCapital Gain = Capital proceeds – cost base of assetCapital Loss = Reduced cost base – capital proceeds
Capital ProceedsSec 116-20(1)
Sec 103-10
Sec 116-30
Sec 116-40
Sec 116-45
Sec 116-50
Sec 116-55
Capital proceeds is the amount of money and the MV of property received or entitled to be received as a result of the disposal.
There is an entitlement to receive if the taxpayer is entitled to have the money or property applied for the benefit, or in accordance with the directions, of the taxpayer.
Capital proceeds DEEMED to be MV where, there is a CGT even AND: No capital proceeds received; Proceeds cannot be value; or The disposer and recipient were not dealing at arm’s length.
Apportionment rule
An adjustment will be made where it turns out that some or all of the capital proceeds is not received and not likely to be received. Adjustment is NOT available if: The deemed MV rules are attached; or If the non-receipt of consideration is due to an act or omission by the
taxpayer or associate or if the taxpayer has not taken all reasonable steps to secure payment
The capital proceeds are reduced by any part of those proceeds that are repaid by the taxpayer and by any compensation paid by the taxpayer that can reasonably be regarded as a repayment of part of the proceeds.
Capital proceeds are increased if entity acquiring the asset acquires it subject to a liability by way of security over asset. The proceeds are increased by amount of liability that the other entity assumes.
Sec 116-30(1)
Sec 116-30(2)
Sec 116-40
Capital Proceeds modification rules:Market value substitution rule No capital proceeds – where taxpayer received no capital proceeds
from CGT event, he/she is taken to have received the MV of asset Capital proceeds are replaced with MV if:
Some or all of these proceeds cannot be value; or The proceeds are more or less than the MV and the parties did not
deal at arm’s length or the CGT event is the redemption, release, abandonment, surrender, forfeiture or cancellation of the asset.
Apportionment Rule:Where proceeds are received in connection with a transaction that relates to more than one CGT event, the proceeds from each event are so much of the payment as is reasonably attributable to each event.
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Sec 116-45
Sec 116-50
Sec 116-55
Non-receipt rule:Capital proceeds reduced if: Taxpayer is not likely to receive some or all of the proceeds It is not because of anything the taxpayer has done or omitted to do;
and Taxpayer took all reasonable steps to get unpaid amount paid. Proceeds are reduced by the unpaid amount. If unpaid amount later received, it is included and the CGT consequences re-calculated.
Repaid ruleCapital proceeds reduced by: Any part of them that the taxpayer repays or Any compensation the taxpayer pays that can be regarded as
repayment.Capital proceeds NOT reduced by any part of payment which is deductible.
Assumption of liability rule:Capital proceeds are increased if another entity acquires asset subject to a liability by way of security over the asset.Increased by amount of liability the entity assumes.
Cost Base
Sec 110-25(1)
Sec 110-25(2)
Sec 110-25(3)
Sec 110-25(4)
Elements of cost base:5 elements:
1) money paid or required to be paid in respect of acquiring asset, or market value of any property given. [per s103-15, taxpayer deemed required to pay money even though not required to until later or it is payable in instalments]
2) Amount of incidental costs of acquisition or that relate to a CGT event that happens in relation to the asset.
Per sec 110-35, it incidental costs include: Remuneration for services of surveyor, valuer, auctioneer,
accountant, broker, agent, consultant or legal adviser Costs of transfer Stamp duty or other similar duty Costs of advertising to find seller or buyer Costs re making of any valuation or apportionment for purposes of
CGT provisions in respect of the acquisition or disposal.
3) For CGT assets acquired on or after 21/8/91, certain non-capital costs of ownership may be included if not otherwise deductible under another provision: Interest on money borrowed to acquire asset Repairs and maintenance
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Sec 110-25(5)
Sec 110-25(6)
Sec 110-40
Sec 110-45
Insurance premiums For land – rates and land taxes; Interest on money borrowed to refinance the money borrowed to
acquired the asset Interest on money borrowed to finance capex incurred to increase
asset value.DOES NOT include cost of obtaining loan per TD 93/1
[note: this element is NOT indexed, per s114-1 and DOES not apply to PUA or collectables – s108-17 and 108-30]
4) Capital expenditure on enhancing the value of the asset PROVIDED it is reflected in the state or nature of the asset at time of disposal
5) Capital expenditure on establishing, preserving or defending the taxpayer’s title to, or right over, the asset.
Expenditures NOT included in Cost Base:For assets acquired before 13/5/97:Expenditure DOES NOT form part of the 2nd or 3rd element of the cost base to the extent that the taxpayer can deduct it.Expenditure DOES NOT form part of the cost base to the extent that the taxpayer receives a recoupment of it – except so far as it is included in taxpayer’s income.
For assets after 13/5/97: Expenditure does not form part of cost base to the extent that the
taxpayer has deducted or can deduct it (provided the deduction has been reversed by an amount being included in income)
Expenditure does not form part of cost base if taxpayer has received as recoupment of it, except so far as it is included in assessable income.
Cost base reduced by amount deductible for capital expenditure incurred by another entity in respect of the CGT asset.
Sec 110-25(7)
Sec 114-1
Sec 114-10(1)
Indexation of cost base:Pre 21/9/99:Cost base of CGT asset acquired at or before 21/9/99 includes indexation of the elements of the cost base.Indexation is for: Individual Complying super fund Trust.
Expenditure included in each element (EXCEPT third element) may be indexed.
Can only index expenditure in the cost base if you had acquired the asset at least 12 months before time of CGT event.
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Sec 110-25(8)
Sec 960-275(2) [all other elements]Sec 960-275(3) [1st element only]
Post 21/9/99For a CGT event occurring after 21/9/99, the cost base includes indexation only if the above entities chooses that the cost base includes indexation.
Indexation factor:Quarter in year of disposal (regardless of when consideration paid) / quarter in year of expenditure arose (note: NOT when paid)
Separate parts of asset:Where two or more parts of the asset were acquired at separate times, their cost bases are indexed separately.
Reduced Cost BaseSec 110-55(1)
Sec 110-55(2)
Sec 110-55(2)
Sec 110-55(3)
Sec 110-55(2)
Sec 110-55(2)
5 elements:
1) money paid or required to be paid in respect of acquiring asset, or market value of any property given. [per s103-15, taxpayer deemed required to pay money even though not required to until later or it is payable in instalments]
2) Amount of incidental costs of acquisition or that relate to a CGT event that happens in relation to the asset.
Per sec 110-35, it incidental costs include: Remuneration for services of surveyor, valuer, auctioneer,
accountant, broker, agent, consultant or legal adviser Costs of transfer Stamp duty or other similar duty Costs of advertising to find seller or buyer Costs re making of any valuation or apportionment for purposes of
CGT provisions in respect of the acquisition or disposal.
3) any amount included in the taxpayer’s assessable income for any income year because of a balancing adjustment for the asset
4) Capital expenditure on enhancing the value of the asset PROVIDED it is reflected in the state or nature of the asset at time of disposal
5) Capital expenditure on establishing, preserving or defending the taxpayer’s title to, or right over, the asset.
Sec 110-55(4)What does not form part of RCB? Expenditure does not form part of RCB to the extent that the taxpayer
has deducted or can deduct it (provided the deduction has been reversed by an amount being included in income)
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Sec 110-55(6) Expenditure does not form part of RCB if taxpayer has received as recoupment of it, except so far as it is included in assessable income.
Modifications to Cost Base
Sec 112-25Split, changed or merged assets:Where: Two or more assets have merged; An asset has been divided into two or more assets; or Asset has been changed, in whole or in part, into an asset of a
different natureThen if any value of these assets is attributable to the original asset, its cost base will include cost base of original asset calculated as if there had been a disposal of the original asset at time when event occurred. (ie. calculate each element of CB and RCB of original asset at time of change; apportion in a reasonable way each element to each new asset)
Sec 112-20 Market value substitution rule:First element of CB and RCB is its MV if: Taxpayer did not incur expenditure to acquire the asset Some or all of the expenditure the taxpayer incurred cannot be valued Taxpayer did not deal at arm’s length with other entity.
EXCEPTION: Right to receive ordinary or statutory income from trust Decoration awarded for valour or brave conduct Contractural or other legal or equitable right Rights to acquire shares, options to acquire shares; units or options to
acquire units Share in a company (issued by the company and taxpayer did not pay
for it) Unit in a unit trust (issued w/o paying for it)
Sec 112-30 Disposal of Part of Asset:Taxpayer only expended part of expenditure in acquiring asset, the first element is that part of the expenditure reasonably attributable to the acquisition of the asset, ie.CB x (Proceeds for CGT event to part/capital proceeds +MV of remainder of asset)
Sec 128-10
Sec 114-10(6)
Sec 128-15(4)
Deceased Estate:When a taxpayer dies, a capital gain or loss from a CGT even happening to a CGT asset the taxpayer owned just before death is ignored.
The 12 month indexation rule applies to the legal representative or beneficiary as if that entity had acquired the asset when the taxpayer acquired it.
If pre-CGT asset in hands of deceased – 1st element of CB or RCB to the legal representative or beneficiary at time of acquisition by them is the MV of asset on the day of death.If post-CGT asset in hands of deceased – 1st element of CB or RCB to
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legal representative or beneficiary is the deceased’s cost base or RCB on day of death.
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Calculation of Gains and Losses
Sec 118-20
Capital Proceeds – Cost Base of Asset = Capital GainReduced Cost Base – Capital Proceeds = Capital Loss
Where an amount is assessable by virtue of the CGT provisions and also under another provision of the ITAA, the amount of capital gain is reduced by the amount assessable under the other provision.
NET Capital gains and LossesSec 102-5(1)
Sec 102-5(2)
If a net capital gain accrues to a taxpayer, that amount is included in the assessable income for the year.
If a net capital loss accrues, it is not deductible, rather it is carried forward for purpose of calculating the net capital gain or loss in the next year (see below).
Sec 102-5(1)Prior to 21 September 19991) Add up capital gains and losses during year2) Subtract capital losses from gains – if zero, then no gain3) Reduce amount further by applying any unapplied net capital losses
from previous years – if zero, then no gain4) Result is net capital gain.
Post 21 September 19991) Reduce capital gains by capital losses made during the year2) Apply any unapplied net capital losses from previous years to reduce
amount3) Reduce by discount percentage each amount remaining after step 2
(see below)4) If any gains qualify for small business concessions, apply the
concessions5) Sum of gains above is your net capital gain.
Sec 102-10(2)
Sec 102-15(1)
Sec 102-15(2)
Sec 102-15(3)
Sec 165-96
Net capital losses:Net capital loss incurred if sum of capital losses incurred during the year exceeds sum of capital gains.
Where two or more net capital losses, apply the losses in order in which they were incurred
Net capital losses can only be applied to extent that it has not already been applied in an earlier income year
Unapplied amounts can be carried forward to next year.
For Corporate taxpayers:Carry forward losses:For 97/98 and later years, cannot apply prior year net capital losses UNLESS:
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Sec 170-105
Sec 170-145(1)
Sec 170-150(1)Sec 170-150(2)
Sec 170-125(1)
Sec 170-125(2)
Same people owned the company during both capital loss year and capital gain year;
No person controlled company’s voting power at any time during the gain year who did not also control it during the whole of loss year.
Or company has carried on same business and not commenced additional business or new transactions.
Transfer of capital losses:Resident company which incurs a net capital loss can transfer the loss to another resident company in the same wholly-owned group where: The gain company has a net capital gain in income year; Loss company is not a dual resident investment company in either the
loss or transfer year; and If the loss year and transfer year are the same – loss company is a
group company If transfer year is later than loss year – loss company is a group
company in loss year, transfer year and all intervening years.
Amount transferred cannot exceed amount of loss company’s net capital loss that, apart from the transfer, loss company would have carried forward to the next year.
Transfer must be made by written agreement which must:a) specify income year of transferb) specify amount transferredc) signed by both public officersd) made on or before day of lodgement of ITR of income company.
If loss company receives consideration for transferred amount:a) consideration is not assessable income nor exempt income; andb) loss company does not make capital gain because of the consideration
If income company gives consideration for the transferred amount:a) gain company cannot deduct consideration; andb) gain company does not make capital loss because of the consideration.
Discount Capital Gain
Sec 115-10Sec 115-15Sec 115-20Sec 115-25
Sec 115-100
A discount capital gain is:a) made by individual, complying super fund, or trustb) result from CGT event happening after 21/9/99c) worked out w/o cost base being indexedd) result from CGT event happening to CGT asset owned by taxpayer for
at least 12 months.
Discount percentage:a) 50% of gain made for individuals or a trustb) 33.33% of gain made by complying superannuation entity or by life
insurance company from a CGT asset that is a virtual PST asset.
When capital gain is NOT a discount gain:
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Sec 115-40
Sec 115-45
Sec 115-25(3)
Capital gain NOT discount gain if resulted from a CGT even that occurred under an agreement the taxpayer made within 12 months of acquiring the asset.
Capital gain NOT discount gain if: CGT even happened to share in a company or an interest in a trust;
and The total of the cost bases of the assets acquired by the company or
trust less than 12 months before the CGT event is more than 50% of the total of the cost bases of the assets of the company or trust at that time.
When CGT events cannot give rise of discount capital gain – refer pg 5-76D1, D2, D3, E9, F1, F2, F5, H2, J2, J3
Capital Gain Averaging Provision – Individuals ONLYRefer to pg 9-40 for formula.
The rules will apply where a trustee pays tax on behalf of a beneficiary or there is no beneficiary presently entitled to the income.
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Rollovers Disposal or Creation of Assets in a Wholly Owned Company by Individual or Trustee
Sec 122-15 Roll-over relief applies when a trigger event occurs to a CGT asset of the taxpayer. The trigger event is when the taxpayer disposes of an asset to a company and are specified as: Event A1 – disposal of CGT asset or all of assets of a business to the
company – s104-10 Event D1 – creating contractual or other rights in company – s104-35 Event D2 – granting an option to the company – s104-35 Event D3 – granting company right to income from mining – s104-35 Event F1 – granting lease to company, or renewing or extending it –
s104-35
Sec 122-25(1)
Sec 122-25(5)
Sec 122-25(6)
Conditions: Must own all shares in the company just after the time of the trigger
event Ordinary income and statutory income of company must not be
exempt from tax because of Div. 50 for the income year of trigger event.
For an individual – must satisfy one of the items in table of the section (residency requirements).
Sec 122-20(1)
Sec 122-20(2)
Sec 122-20(3)
Sec 122-20(4)
Consideration for disposal or creation:Consideration received for trigger event MUST BE ONLY: shares in the company where CGT asset, or all assets of the business are transferred to
company – shares in company and the company undertaking to discharge one or more liabilities in respect of the assets of the business (see below)
The shares CANNOT be redeemable shares
The MV of shares received must substantially be the same as: for a disposal case – MV of assets transferred less any liabilities the
company undertakes to discharge in respect of the assets. In any other cases – MV of assets created in company.
Any contingent liability inherent in a transferred asset (eg. contingent tax liability) is ignored in comparing MV’s of the assets disposed of and the shares received.
Sec 122-35Restrictions where company assumes liabilities:Where taxpayer disposes of CGT asset and company assumes one or more liabilities, roll-over only available if the amount of liabilities does not exceed: MV of asset if asset acquired by transferor pre 20/9/85; OR Sum of MV’s of precluded assets and cost bases of other assets
(precluded assets are car, motorcycle, trading stock, etc).
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Sec 122-37(2)
Sec 122-37(3)
Where taxpayer disposes all assets of business – liability incurred for purposes of business is NOT a liability in respect of a specific asset/s of the business. It is taken to be liability re all assets of the business.
If liability is in respect of 2 or more assets – apportion the liability.
Consequences of roll-over:Refer to pg 5-84
Sec 122-25(2)
Sec 122-25(3)
Where rollover is NOT available: Roll-over relief does not apply to disposal or creation of these assets:
PUA and collectables Decoration awarded for valour or brave conduct Car, motor cycle Asset that becomes trading stock just after disposal or creation.
Some precluded assets cannot be rolled over unless they are disposed of as part of the disposal by taxpayer of all assets in the business – ie. cannot be rolled over individually.
Precluded assets are car, motorcycle, trading stock, etc.
Partnership Asset Rolled over to Wholly Owned CompanyRefer pg 5-89
Transfer of Assets Between Group Companies in the Same Wholly Owned Group
Sec 975-500Wholly owned group:Company will be in the same wholly-owned group if: One of the companies is a 100% subsidiary of the other company or Each of the companies is a 100% subsidiary of the same third
company.
Sec 126-50(1)
Sec 126-50(2)
Sec 126-50(3)
Sec 126-50(4)
Requirements for a roll-over relief: Originating and recipient company must members of the same wholly-
owned group at time of trigger event CGT asset must not be trading stock of recipient company just after
trigger event If roll-over asset is a right, option or convertible note and the recipient
company acquires another CGT asset by exercising right or option or by converting the convertible note, other asset cannot become trading stock of the recipient company just after acquisition
Ordinary and statutory income of recipient company must not be exempt from tax due to Div. 50 for the income year of trigger event
Sec 126-55 When do roll-over provisions apply?There is roll-over if:a) either:
the trigger event would have resulted in the originating company making a capital gain or making no capital loss and not being entitled to a deduction; or
originating company acquired the roll-over asset pre 20/9/85;
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ANDb) the originating company and recipient company both choose to obtain
it.
Sec 126-50(5) Residency requirements for roll-over:Transferor – resident; Recipient – Resident Then does not matter what the roll over asset is.
Transferor – NR; Recipient – ResidentAsset must have necessary connection with Aust. Just before trigger event (for disposal case) and just after that time (for creation case.
Transferor – Irrelevant; Recipient – NRAsset must have necessary connection with Aust. Just before trigger event (for disposal case) and just after that time (for creation case.
Sec 126-60(1)
Sec 126-60(2)
Sec 126-60(3)
Sec 126-60(4)
Sec 126-60(5)
Consequences of roll-over:For originating company in all cases:Capital gain or loss from trigger event disregarded.
For recipient company (disposal case): if originating company acquired asset post-CGT, 1st element of CB
(for recipient company) is asset’s CB or RCB in the hands of originating company at time of acquisition.
If roll-over asset acquired pre-CGT, the recipient company taken to have acquired it pre-CGT
If PUA involved, then recipient company taken to have acquired a PUA.
For recipient company (creation case): First element of CB and RCB is:
Event D1 – incidental costs the originating company incurred Event D2 – expenditure incurred to grant option Event D3 – expenditure incurred to grant the right Event F1 – expenditure incurred on grant, renewal or extension of
lease.
Roll-overs on certain liquidations: sec 126-85
Sec 104-175When companies cease to be related – roll-over relief lost:Withdraws benefit of company roll-over relief if:a) an asset was transferred to another group company by way of a roll-
over or a series of roll-overs under subdiv. 126-B.b) recipient company is not the ultimate holding company re disposalc) company ceases, at some time, when it still owns the roll-over asset,
to be a subsidiary in relation to the wholly-owned group of transferor or first transferor if a series of roll-overs involved; and
d) the cessation is not a sub-group break up.
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Small Business ConcessionsGeneral Conditions
Sec 152-15
Sec 152-35Sec 152-50 to 152-60
Conditions for entitlement to concessions: Net value of assets owned by business entity and related entities must
be $5m or less CGT asset involved must be active asset (see below) If asset is a share or an interest in a trust, there must be a controlling
individual (of company – right to exercise at least 50% of voting power and right to receive at least 50% of dividend; trust – beneficially entitled to at least 50% of income and capital of trust) just before the CGT event and the business entity must be a CGT concession stakeholder (ie. controlling individual of company or trust; for company – spouse of controlling individual if spouse has legal or equitable interests in shares; for trust – spouse of controlling individual if spouse is beneficially entitled to income or capital of trust) in the company or trust.
Sec 153-15
Sec 152-20(1)
Sec 152-20(2)(a)
Sec 152-20(2)(b)
Net value of assets:Net value of assets test is satisfied if, just before the CGT event, the sum of the net value of CGT assets owned by: Small business entity; Entities connected with the small business entity (see below); and Small business CGT affiliates (see below) of the small business entity
or entities connected with such affiliatesDoes not exceed $5m.
The net value of the CGT asset = Sum of MV’s of assets – sum of liabilities of entity relating to the assets.[NOTE: ensure that liabilities taken into account relate to the specific assets included].
Assets NOT counted towards $5m: Shares, units or other interest (except debt) in another entity connected with the particular person or with a small business CGT affiliate of that person.
If the entity is an individual, Assets being used solely for personal use and enjoyment of entity or
entity’s small business CGT affiliate Dwelling of the individual or ownership interest in such dwelling if
individual was using dwelling to produce assessable income but does not satisfy s118-190(1)(c) re deductibility of interest.
Right to any allowance, annuity or capital amount payable out of a super fund or an ADF; and
Right to an asset of a super fund or of an ADF Policy of insurance on individual’s life.
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Sec 152-20(3) Net value of CGT asset of small business CGT affiliate – disregard assets of affiliate not used, or held ready for use in carrying on a business that the entity carries on.
Sec 152-25 Small business CGT affiliate:Is a person who: Is your spouse or child under 18 years; or Person acts or could reasonably be expected to act, in accordance with
your directions or wishes or in concert with you.
Sec 152-30 Entity connected with another entity:Requires that: Either entity controls the other in the way described in section; or Both entities are controlled in that way by same 3rd party.[basically at least 40% of any distribution of income or capital; or voting power in company; for trusts – entity has power to determine manner in which trustee exercise power to may payment, owning interest in distributions up to maximum % trustee is empowered to pay]
Sec 152-40(3)
Sec 152-40(4)
Active Asset Test:CGT asset is active asset if you own it and: Use it, or hold it ready for use, in course of business; or It is an intangible asset that is inherently connected with a business
that you carry on It is used or held ready for use, in the course of business carried on by:
Your small business CGT affiliate; Another entity connected with you.
It is either a share in a company that is a resident or an interest in a trust that is a resident for the income year in which it occurs; and
Total of: MV’s of active assets of company or trust; AND Any capital proceeds that company or trust received, during 2
years before that time, from CGT events happening to its active assets and the company or trust holds in the form of cash or debt pending the acquisition of new active assets;
Is 80% or more of MV of all assets of company or trust.
CANNOT be active assets: Interests in an entity that is connected with you, other than shares and
interests covered above Shares in companies, other than shares covered above Interest in trusts, other than interests covered above. Financial instruments (loans, debentures, bonds, promissory notes,
futures contracts, forward contracts and right or option in respect of a share, security, loan or contract)
An asset whose main use in the course of carrying on business mentioned above is to derive interest, an annuity, rent, royalties or foreign exchange gains, UNLESS: Asset is an intangible asset and has been substantially developed,
altered, or improved by you so that its MV has been substantially
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enhanced; or Main use for deriving rent only temporary.
Small Business 15 Year Asset ExemptionSec 152-105 Applies where:
General conditions are satisfied for the gain Individual continuously owned the CGT asset for the 15yr period
ending just before CGT event; If CGT asset is a company share or interest in trust – company or trust
has controlling individual at all times during the whole period the taxpayer owned the asset. HOWEVER, does not have to be same controlling individual.
At time of CGT event, individual is either: 55 yrs of age or over and event happens in connection with
retirement; or permanently incapacitated.
If conditions satisfied, individual can disregard any capital gain arising from the CGT event.
Small Business 50% Active Asset ConcessionSec 152-205 Amount of net capital gain is reduced by 50% if the general conditions are
satisfied for the gain.
Sec 152-210(1)
Sec 152-210(2)
The capital gain reduced by 50% may also qualify for the small business retirement exemption and/or a small business rollover.
If they qualify, you can the order in which to apply them.
Small Business Retirement Exemption
Sec 152-305
Sec 152-305(2)
Need to satisfy general conditions for exemption to apply.ALSOIf taxpayer under 55 just before receiving capital proceeds from a CGT event, the gain must be rolled over as ETP in accordance with this section. Ie. s27D must require amount to be taken to have been expended in
making payment to: complying super fund for provision of super benefits complying ADF RSA held by taxpayer.
If taxpayer is 55 or older, the requirement does not apply.
Company or trust can choose to disregard all or part of a capital gain if: General conditions satisfied Controlling individual test satisfied Company or trust conditions (s152-325) satisfied.
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Small Business Asset RolloversSec 152-410 Can choose to obtain a roll-over for a gain if:
General conditions satisfied Within period starting one year before and ending 2 years after the last
CGT event during the year for which you choose the roll-over, you choose on or more CGT assets as replacements
Replacement asset satisfies conditions in s152-420.
Sec 152-415If you choose the roll-over:So much of the capital gain that would have remained apart from the roll-over as does not exceed the total of the 1st and 2nd elements of the cost base of the replacement asset is ignored.
Sec 152-420 Conditions of a replacement asset:Taxpayer must acquire asset during the period: Starting 1 yr before; and Ending two years afterThe occurrence of the last CGT event in the income year for which the taxpayer obtains the roll-over.
Replacement asset must be an active asset: When acquired; or By end of two years after last CGT event during the income year for
which the taxpayer obtains the rollover.
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Transitional ProvisionsChange in Majority Underlying Interest
Sec 149-30(1)
Sec 149-30(2)
Deemed acquisition:Asset acquired pre-CGT stops being pre-CGT at earliest time when majority underlying interest in asset not had by ultimate owners who had MUI in asset before 20/9/85
Where asset stops being pre-CGT 1st element of CB is asset’s MV at that time.
Sec 149-15(1)
Sec 149-15(2)
Majority Underlying Interest:Consists of: >50% of beneficial interest that ultimate owners have (directly or
indirectly) in asset; and >50% of beneficial interest that ultimate owners have (directly or
indirectly) in any ordinary income that may derive from the asset.
Underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (directly or indirectly) in asset or any ordinary income derived from asset.
Sale of Pre-CGT Interest in Interposed EntityRefer pg 9-61
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PARTNERSHIPS
Definition of PartnershipSec 995-1(1) or s6(1) Partnership is an association of persons carrying on business as partners
or in receipt of ordinary income or statutory income jointly, but does not include a company.
TR 94/8 Indicators of existence of ptsp include: mutual assent and intention of parties (this is the essential element per
Jolley v. FCT) joint ownership of business assets registration of business nature joint business account and power to operate it extent to which parties are involved in conduct of business extent of capital contributions entitlements to a share of net profits business records trading in joint names and public recognition of ptsp sharing of contributions to assets and capital joint leasing or ownership of business premises readiness with which partners’ respective financial interests can be
ascertained; and evidence of drawings by partners against their respective share of ptsp
profits.
United Dominions Corp Ltd v. Brian Pty Ltd
Ptsp vs. Joint Venture:A partnership is an association of persons who engage in a common undertaking for profit. A JV is an association of those who do so in order to generate a product to be shared among participants. Also refer pg 11-3
Sec 92(1)(a)
Sec 92(2)(a)Sec 92(3)(a)
Sec 92(1)(b)
Sec 92(2)(b)
Sec 92(3)(b)
Taxing Partners:Resident Partners: include in assessable income their individual interests in net income of
ptsp claim deduction for individual interests in ptsp loss include in exempt income their individual interests in exempt income
of ptsp.
Non-Resident Partners: include in assessable income their individual interests in net income of
ptsp that is sourced in Australia claim deduction for individual interests in ptsp loss sourced in
Australia include in exempt income their individual interests in exempt income
of ptsp sourced in Australia.
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Calculating Partnership Net Income or LossWIP Payments
Stapleton v. FCT; FCT v. Grant & Ors
Payment received by a retired partner on account of WIP unbilled at time of retirement is assessable income in hands of retired partner.
DividendsSec 160AQT Franked dividends received by ptsp included in assessable income and is
grossed up to include the company tax attributable to the dividend.
Sec 160AQT(1) Gross up amount = Class C franked amount x 36/64 (for 30/6/00)Gross up amount = Class C franked amount x 34/66 (for 30/6/01)
Sec 160AQZ Imputation credit provided where assessable income includes the ‘grossed up’ amount. Rebate is available to each partner’s share of the imputation credit.
Partners’ SalariesEllis v. Joseph Ellis & Co
IT 2218
Partner cannot be employee of a partnership so a partner salaries cannot be a deduction from ptsp income.
Any partner salaries paid are treated as entitlement to allocation of profits prior to general division among partners.
Interest Payments
Roberts and Smith
TR 95/25
TD 200/24
Interest on external borrowings to reduce capital deductible where borrowing by ptsp is for permitting certain amounts of ptsp capital to be returned to existing partners.
Interest on loan deductible to ptsp where loan used to replace working capital used in business carried on by ptsp.
PROVIDED the capital account reduced represents funds employed in the ptsp business resulting from contributions or retention of earnings NOT capital generated such as loan is used to replace partnership capital which is represented by internally generated goodwill or unrealised revaluations of assets.
Interest incurred by partner on borrowings to pay personal income tax not deductible.
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Superannuation contributions
Sec 82AAT
Partnership cannot claim deduction under s82AAC or s82AAT for contribution to a superannuation fund in relation to a partner. BUT the partner can claim deduction under s82AAT for personal super contributions.
Partners total deduction must not exceed the lesser of: first $5,000 contributed + 75% of excess of total amount contributed
over $5,000 partners aged-based limit for income year.
Payments to Relatives and Related EntitiesSec 26-35 Where ptsp makes payment or incurs liability to a person who is a
relative, or other person associated with a partner, which is an unreasonable amount, the deduction may be reduced.
Calculation of Partners’ Taxable IncomeSec 92 Partnership loss not allowable to ptsp but is instead distributed to partners
in the year incurred.
Change in Partnership StructureIT 2540 For admission of new partner:
Existing partners each dispose of part of their interest in the assets of the ptsp for their share of the consideration paid by incoming partner. If capital proceeds > cost base, then assessable gain will be taxed in hands of partners.
For retiring partner:Disposing of interest in ptsp asset, an assessable gain will arise if capital proceeds > cost base.
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TRUSTEES AND BENEFICIARIES
Present Entitlement and Legal Disability
FCT v. Whiting; Taylor v. FCT
Sec 95A(2)
Sec 101
Present Entitlement:Conditions: Beneficial interest in trust income must be indefeasible, and
absolutely vested in B, not contingent Beneficiary must be able to demand immediate payment of that
income, or would be able to except for a legal disability Trustee may properly reinvest, accumulate, capitalise or otherwise
deal with the distribution as B directs on his behalf. Income must be available for distribution to B in accordance with trust
law.
Deemed present entitlement:Where B has vested and indefeasible interest in income of a trust, B is deemed to have a PE to the income even though B may not be able to demand immediate payment.
Where T of a discretionary trust has discretion to pay or apply income to or for the benefit of a B, B is deemed to be PE to the amount paid or applied from the exercise of the discretion.
Legal disability:Use ordinary meaning – person unable to give trustee an immediate valid discharge in respect of a distribution of trust income (eg. minor, lunatics, felons, undischarged bankrupt).
Trust IncomeWhat is Taxed?
Sec 95(1) Net income = assessable income – allowable deductions[calculated as though trustee is resident]
Sec 160AQT
Sec 160AQT(1)
Sec 160AQZ
DividendsFranked dividends received by trust included in assessable income and is grossed up to include the company tax attributable to the dividend.
Gross up amount = Class C franked amount x 36/64 (for 30/6/00)Gross up amount = Class C franked amount x 34/66 (for 30/6/01)
Imputation credit provided where assessable income includes the ‘grossed up’ amount. Rebate is available to each beneficiary/trustee’s share of the imputation credit.
Residency and SourceDiv. 6 Where there is present entitlement, the beneficiary/trustee is assessed on:
so much of that share of net income of trust estate as is attributable to a period when the B was a resident; and
so much of that share of net income of trust estate as is attributable to
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Sec 95(2)
a period when the B was not a resident and is also attributable to sources in Australia.
If no presently entitled B’s, residency test applied to trust estate. Trust is a resident if: a trustee is a resident during any time during the year the central management and control of the trust estate was in Australia
at any time during year of income.
Trust LossesSec 265-5
Sec 269-15(1)
Sec 269-20
Sec 269-25
Sec 269-30
Sec 269-35
Change in ownership or control OR abnormal trading in trust units:If there is a change in ownership or control OR an abnormal trading in trust units, it: may be prevented from deducting its tax losses of earlier income
years; and may have to work out in a special way its net income and tax loss for
the income year; and may be prevented from deducting certain amounts in respect of debts
incurred in income year or earlier income years.UNLESS trust is an excepted trust (refer pg 12-9).
What is abnormal trading?Look at: Timing of trading, compared to normal timing for trading Number of units traded, compare to normal units traded Any connection between trading and other trading in units in the unit
trust; and Any connection between the trading and a tax loss or other deduction
of the trust.
T knows or reasonably suspects that it is part of an acquisition of the trust or merger of the trust with another trust
There is an acquisition of 5% or more of the units in a single transaction, except in case of wholesale widely held trust
There is suspected acquisition of 5% or more of the units by a person, or a person together with associates, where such trading is prompted by availability of tax loss or other deduction
Over any 60 day period, more than 20% of the units on issue are traded.
Trust Loss Tests Sec 269-55
Sec 269-55(2)
50% Stake Test:Trust satisfies the test if, at all relevant times during the test period: same individuals have fixed entitlements, directly or indirectly, to
more than 50% of the income of the trust; and same individuals have fixed entitlements, directly or indirectly, to
more than 50% of the capital of the trust.
For a widely held unit trust, the 50% stake test will be satisfied where it is reasonable to assume that the requirements of the test are met.
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Test period:Is the beginning of the loss year, end of loss year and the time of abnormal trading or change in ownership or control.
Subdiv. 269-F Same business test:Test is satisfied if: at all times during the same business test period, the trust carries on
same business it carried on immediately before start of that period (‘test time)
at any time during the same business test period, trust does not derive assessable income from business of a kind it did not carry on before the test time or from a business transaction of a kind it had not entered into before the test time
before the test time, the trust does not start to carry on a business it had not previously carried on or enter into a business transaction of a kind it had not previously entered into, for the purpose of satisfying the same business test; and
where trust is seeking to deduct a current year loss, it does not, at any time, in the same business test period, incur expenditure in carrying on a business of a kind it did not carry on before the test time or incur expenditure as a result of a business transaction of a kind it had not entered into before the test time
Sec 267-30
Subdiv. 269-D
Sec 267-35
Sec 269-65(1)
Pattern of distribution test:If the trust is not an excepted trust and it was, at any time in the test period, a non-fixed trust and: in the income year, or within two months after its end; and in at least one of the six earlier income years,the trust distributed income or capital.The trust will pass the test which will allow it to access prior year tax losses (sec 267-20) and claiming tax deductions (sec 267-25)
Pattern of Distribution test SATISFIED if, within 2 months of end of income year: trust has distributed, directly or indirectly, more than 50% of every
‘test year distribution’ of income to the same individuals for their own benefit; and
trust has distributed, directly or indirectly, more than 50% of every ‘test year distribution’ of capital to the same individuals for their own benefit (need not be same individuals as above).
The trust MUST NOT have been prevented from deducting the relevant deductions in an earlier income year because of a failure to meet the conditions in the patter of distribution test.
Test year distribution is:Is total of all distributions of income made by trust in any of the following periods, PROVIDED the period does not start more than 6 years before the start of the income year:
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Sec 269-70
Sec 269-80
a) the period from the start of the income year until 2 months after its end.
b) If trust distributed income before the trigger year (ie. loss year mentioned in s267-20 per s269-65(2)) – the prior income year that is closest to the trigger year.
c) [if (b) does not apply] If the trust distributed income in the trigger year – the trigger year
d) [if (b) and (c) do not apply] – the income year, closest to trigger year, in which the trust distributed income;
e) each intervening year between the one in (a) and the one in (b), (c) or (d).
If the share of income distributed to each individual varies from year to year, then only the smallest percentage distribution is taken into account for the purpose of test year distributions.
EXCEPTION: if there is a loss of entitlement to future distributions due to death or marriage breakdown, the income or capital received by this individual is ignored in determining test year distributions.
Subdiv. 269-ESec 267-45
Sec 269-95(1)
Sec 269-95(2) & (3)
Control test:Requires that no group begin to control the trust, whether directly or indirectly, in the test period (which is the year relevant deduction was incurred, each intervening income year and income year, per s267-20).
Group gains control when: the group has power to obtain, or is capable under a scheme of
obtaining, the beneficial enjoyment of the income or capital of the trust (eg. by ensuring the exercise of the trustee discretion in their favour)
group is able to control directly or indirectly, or is capable under a scheme of obtaining control of, the application of the income or capital of the trust.
Trustee is accustomed, is under an obligation or might reasonably be expected to act, in accordance with the directions or wishes of the group;
Group able to remove or appoint T or any of the T’s; or Group gains fixed entitlements to more than 50% of the income or
capital of the trust.
Control of trust taken not to have changed where a member of the controlling group dies, becomes incapacitated or suffered a marriage breakdown. (sbj to certain conditions)
Sec 270-10 Income injection test:Applies where: Trust has a deduction (incl. prior year losses) in the income year; There is a scheme under which:
Trust derives assessable income in income year; Person not connected with the trust (outsider) provides a benefit
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directly or indirectly to the trustee or B (or their associates); It is reasonable to conclude that any one or more of the following
is the case:a) Scheme income has been derived wholly or partly, but not
merely incidentally because the deduction is allowableb) Benefit has been provided to T or B wholly or partly, but not
merely incidentally because deduction is allowablec) Benefit has been provided by T or B wholly or partly but not
merely incidentally because deduction is allowable.
Consequence: If Net Income < Scheme assessable income, Net income increased to
equal scheme income. If deduction relates exclusively or may appropriately be related to the scheme assessable income, it is not allowable to the trust. ALSO, no deduction is allowable against the scheme assessable income.
Implications of Family Trusts:
Sec 272-75
Sec 272-87(1)
Sec 272-87(2)
[Family trusts do not need to satisfy the tests, except for income injection test]
What is a family trust?Where T has made an election (family trust election) that the trust be a family trust and the election is in effect.
CANNOT make a family trust election unless it satisfies the family control test at the end of the income year. That is:a) individual specified in election (test individual) and one or more
members of his/her family (ie. spouse, child, grandparent, parent, niece, nephew and spouse’s relatives, per s272-95); OR
b) any of persons above and a professional or legal adviser to the family (does not apply if test individual and/or one or more members of the family have more than a 50% stake in the income or capital of the trust); OR
c) trustee of one or more family trusts, or such T and any persons above (if controlling group has more than 50% stake in income or capital of the trust).
Group is taken to have control of the trust if: the group is able to obtain directly or indirectly the beneficial
enjoyment of the income or capital of the trust (eg. by ensuring the exercise of the trustee discretion in their favour)
group is able to control directly or indirectly, or is capable under a scheme of obtaining control of, the application of the income or capital of the trust.
Trustee is accustomed, is under an obligation or might reasonably be expected to act, in accordance with the directions or wishes of the group;
Group able to remove or appoint T or any of the T’s; or Group gains fixed entitlements to more than 50% of the income or
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Sec 272-87(3)
Div. 271
capital of the trust.
Interposed Entities:A company or ptsp in respect of which an interposed entity election is proposed to be made passes the family control test if a group consisting of:a) the individual who is specified in the family trust election above in
relation to the interposed entity electionb) one or more members of the individual’s family; orc) T’s of one or more family trusts, provided individual is specified in
the family trust election of each of those family trusts; ord) Any persons covered by any combination of the above;Have, between them, directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% of the share of income or capital of the coy or ptsp.
Family Trust Distribution Tax:Special tax payable where: T of family trust has made family trust election; or partners in ptsp, a
company or trustee of a trust have made an interposed entity election to be included in a family group in relation to a family trust; and
The trust, ptsp or coy makes a distribution of, or confers present entitlement to, income or capital to a person other than the test individual or member of his/her family group.
Tax is 48.5% of the amount of distribution.
Net Income v. Accounting IncomeWhere Net Income for tax purposes > Accounting income (amount that can be distributed):Two views on how to treat:a) Proportionate view – B is taxed under s97 or T under s98 if B under
legal disabilityb) Quantum view – No B is presently entitled to that income in excess of
amount distributed to B’s and therefore cannot be assessed. T taxed under s99 or 99A.
Where Net Income < Accounting Income:Taxable income assessed, any excess accounting income distributed not liable to taxation.
Taxation of Trust IncomeRefer to pg 11-6
Beneficiary Presently Entitled and No Legal DisabilitySec 97(1) Beneficiary shall be assessable on share of income:
That is attributable to a period when B was resident, whatever the source; and
Share of net income that is attributable to Australian sources during the period when B was not a resident.
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B assessed at marginal rates.
Sec 98 If Beneficiary is non-resident:Income is taxed first to Trustee under s98(3), (4) and then to B with a credit being for tax already paid by T.
B deemed presently entitled:If deemed presently entitled under s95A(2), T will be taxed under s98.
But if B is a company or beneficiary in his capacity as a T of another trust, then assessable under s97.
Beneficiary presently entitled BUT under legal disabilitySec 98 Where presently entitled B is under a legal disability, T will be liable to
pay the tax on B’s share of the income – Based on rates applicable to the Beneficiary.
If B receives other income, trust income is added to other assessable income. A credit for the tax paid by trustee is allowed under s100 BUT credit cannot exceed tax payable.
Where no Beneficiary presently entitledSec 99A All income to which no B is presently entitled falls firstly under s99A and
is taxed at the highest rate of personal tax, ie. at flat rate of 47% in hands of Trustee.[NOTE: foreign sourced income is only taxable if trust is a resident]
Sec 99
Commissioner’s discretion:Commissioner has a discretion to assess under s99 if he is of the opinion that it is unreasonable to assess under s99A.
Net income, EXCEPT net income of an estate of a person who died <3yrs before end of income year (in this case, income taxed at general individual rates) is taxed at progressive rates: If non-resident trust estate – use rates on pg 12-26 for ‘prescribed NR
beneficiaries’ If resident trust estate – use rates on pg 12-27.
Categories of income the Commissioner will allow under s99:Refer pg 12-27
Deceased EstatesSec 101A Income received after death:
T is assessed on income received in a deceased’s estate if the deceased would have been assessed on it.
This income, together with other amounts to which no B is presently entitled, is assessed under s99A, unless Commissioner exercises his discretion to assess it under s99.
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Receipt of trust income NOT previously subject to taxSec 99B A B, resident at any time during the income year, is assessable on
amounts paid to him or applied for his benefit which has not previously been subject to Australian tax.
Distributions out of corpusTindal v. FCT; Bradies Trustees v. IR Commissioners
Where distributions are out of corpus of a trust to make up a deficiency of income or are an advance on income, they are assessable in hands of recipiend.
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COMPANIES
What is a Company?Public Company
Sec 103A(2)
Sec 995-1
A public company is one that: Has its non-preference shares listed on a stock exchange on the last
day of the income year, and at: No time in the year of income did 20 or fewer people share 75%
or more of the company’s capital, voting or dividend rights (s103A(3))
Nor were the voting or dividend rights capable of being varied to produce such a result (sec 103A(6))
Was a cooperative company; or Has at all times since date of incorporation been a non-profit company
and prohibited from making a distribution to its members or their relatives; or
Is a mutual life assurance company; or Is a friendly society dispensary; or Is a subsidiary of a public company; or Is a statutory body or a company in which a government body has a
controlling interest in as at the last day of the income year; or Is a registered society, trade union or employer association; or Is a limited partnership.
A private company is one which is not a public company.
Company Bad DebtsSec 8-1 or s25-35 Company can claim deduction for bad debt under either sections (s25-35
are for debts written off) (Refer to above – Deductions/Specific Deductions).
Subdiv. 165-C, 166-C and 175-C
Sec 165-120(2)
Sec 165-120(3)
To be allowed deductions, company must: Write off the debt in the year of the claim AND:
A more than 50% continuity of ownership test with regard to the ownership test period (ie. deduction year, debt year and all intervening years) is satisfied per s165-123; OR
A continuity of business test per s165-126 is satisfied. For debt incurred and written off in same year, the continuity of
ownership test must be satisfied in whole of income year
A company cannot claim a deduction for a debt incurred and written off as bad on the final day of the income year.
Tax Losses [also pg 65]Refer to pg. 12-16
Implications for Shareholders of Dividends
Sec 567-25Refund of excess imputation credits:Where you have credits left after offsetting your tax payable, you are
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entitled to receive a refund
Sec 44(1) (inclusion in Y); s160AQT (for gross up)
Sec 160AQT(1AB)
Sec 160AQU
Sec 128B(3)(ga)
Sec 128D(1)
For INDIVIDUALS:Shareholder includes grossed up amount of dividend in assessable income.Grossed up amount = Dividend x 64/36
Imputation credit = Franked amount of dividend x 36/64
A tax rebate generally equal to the amount of the imputation credit is allowed to the shareholder.
For Non-Resident Individuals:Where they are paid the franked dividends, it is the final tax imposed on the dividend so they do not pay any WHT on the dividends.Where they are paid unfranked dividends, the WHT is the final tax. The unfranked portion is not included in assessable income. NO rebate available for franked portion.
Sec 44Sec 160AQTSec 46Sec 160APP
Sec 95
Sec 97
Sec 160APQSec 45Z
Sec 92
Sec 160APQSec 46
Sec 160AR
For Corporate Shareholders:A company includes the dividend assessable in its income.Dividend not required to be grossed up.Inter-corporate dividend may be availableFranked amount of dividend credited to company’s franking account.
Where company receives dividend through trust: The gross up amount under s160AQT is included in assessable
income of the trust and therefore in net income of trust. Company is to include in its assessable income its share of the net
income. [coy will need to include gross up amt in income] Franking credit will arise on franked part of dividend Company treated as direct s/holder and inter-corporate dividend rebate
may be available for the dividend.
Where company receives dividend through partnership: The gross up amount under s160AQT is included in assessable
income of the ptsp and therefore in net income of ptsp. Company is to include in its assessable income its share of the net
income. [coy will need to include gross up amt in income] Franking credit will arise on franked part of dividend Company treated as direct s/holder and inter-corporate dividend rebate
may be available for the dividend.
The company is entitled to an allowable deduction equal to so much of the potential rebate amount or class C potential rebate amount in relation to the trust amount as does not exceed the trust amount included in assessable income. [Refer pg 13-28]PR amount = Grossed up amount for dividend (ie. dividend x 36/64)
For Trust Shareholders:
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Sec 160AQT
Sec 160AQW(1)
Sec 160AQY
Sec 160AQV to s160ARD
Trustee is to include dividend gross up amount as assessable income.
Sec 160AQT amount shall be included in any relevant trust amounts in same proportions as persons are liable to be assessed or would but for s128D be assessed in respect of the franked dividend (ie. apportion dividend and gross up amount between beneficiaries – beneficiaries also claim their portion of the rebate).
Trustee who is liable to be assessed under s98 or 99 or 99A can claim the relevant potential rebate amount in that assessment.
Where franked dividends are received indirectly through trusts, they are treated as if they had been received directly.
Sec 160AQT
Sec 160AQW(1)
Sec 160AQZ
Sec 160AQV to s160ARD
For Partnership Shareholders:Partnership is to include dividend gross up amount as assessable income.
Sec 160AQT amount shall be included in any relevant partnership amounts in same proportions as persons are liable to be assessed or would but for s128D be assessed in respect of the franked dividend (ie. apportion dividend and gross up amount between partners – partners also claim their portion of the rebate).
Franking rebates of partners will be equal to the potential rebate amount in that partnership amount.
Where franked dividends are received indirectly through partnerships, they are treated as if they had been received directly.
Franking AccountFranking account entries: Refer pg 12-70
Sec 160APLCarry forward of franking surplus:The surplus in the franking account at the end of the year is available to be carried forward to the following year.[REMEMBER: to covert the credit to tax paid basis for 2003 year
Sec 160AQDEstimated debit determination:A company can lodge an application with the Commissioner for a determination of the estimated franking debit which is expected to arise if it expects to have its future tax liability reduced (hence have its franking account adjusted accordingly).
Penalty Taxes
Sec 160AQJ
Sec 160AQJ(1B)
Franking Deficit Tax:FDT will arise where there is a debit balance in the franking account at the end of the year, ie. franking deficit.
FDT = Class C franking deficit x 36/64
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Sec 160ARU
Sec 160AQK
This tax is due and payable on the last day of the month following the end of the relevant year.
Where FDT is paid, it may be offset against company tax subsequently assessed provided company was ‘sufficiently resident’ in the relevant year.The offset is calculated as the lesser of: Amount of franking deficit tax that has not otherwise been applied The amount of company tax reduced by FTC applicable to the income
year.[NOTE: payment of FDT does not give rise to a franking credit]
Sec 160ARX
Sec 160ASB; IT 2560
Franking additional tax:FAT penalty applies where: The class C franking deficit of a company at the end of the year is
more than 10% of the total of the class C franking credits during the year; AND
The class C franked amount of a dividend paid during the franking year to s/holders in the company exceeded the class C required franking amount (see below) for that dividend.
FAT = FDT x 30%
The commissioner has discretion to reduce amount of penalty.
Sec 160AQJC
Sec 160ARUA
Deficit Deferral Tax:DDT arises where company pays instalment/s during the year and during the next franking year, a company receives a refund on the instalments because: Commissioner waives or reduces the instalment – s221AZL; Company lodges a downward estimate after paying an instalment
which results in the instalment being refundable – s221AZQ.The company here needs to have a Class C franking deficit or increased franking deficit IF the refund were to be payable in the year in which instalment was paid.
DDT = Deficit deferral amount x 36/64Deficit deferral amount = the amount of deficit or deficit increase which would have arisen if the refund had been received or credited in the same franking year as the payment.
DDT due and payable 14 days after relevant refund is received.
Sec 160ARYC
Franking Deficit Deferral Additional Tax:Arises when Class C deficit deferral amount arising under s160AQJC (ie. calc. of DDT) exceeds 10% of the following:Total class C franking credits in first year – (s160AQJC refund x 64/36)
DDAT = DDT x 30%
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Sec 160AQF
Sec 160AQE
Sec 160AQE
Sec 160AQDB
Sec 160APX(1B)
Sec 160ARX(3)
Required franking amount:When a company pays a frankable dividend to a resident shareholder, it must frank the dividend to the RFA.
Is the minimum amount a dividend is required to be franked in order to avoid being regarded as under-franked. Therefore: If franking surplus > Dividend – whole of dividend must be franked If franking surplus < Dividend – dividend partly franked to extent of
surpluses If no surplus, no need to frank.
RFA = Dividend amount x (Franking surplus/Total dividends + Committed future dividends + same day dividends + Linked Dividends + Substituted Dividends)
RFA is ascertained from the franking account balances at time of payment of dividend.
Underfranking if: Class C RFA > 10% of amount of dividend; and The RFA > franked amount of dividendAutomatic class C franking debit will arise in the franking account equal to underfranked amount.
Overfranking if: Class C franking deficit at end of year > 10% of total of Class C
franking credits arising during the year; and Class C franked amount of dividend paid during franking year > RFALiable to pay FAT (see above)
Franking Account returns and assessment
Sec 160ARH
Companies are required to lodge franking account returns if they have franking deficit tax liability.
An assessment of the company’s franking account balance which is deemed to have been made by the Commissioner and served on the company at time the return was lodged.
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Deemed DividendsDistributions by a liquidator
Sec 47(1)
Sec 47(1A)
Distributions to s/holders by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company other than income which has been properly applied to replace a loss of PUC, shall be deemed to be dividends paid to s/holders out of profits derived by it.
The term ‘income’ has been extended to include: Any amount that is assessable income of the company under any
provision of the ITAA other than the CGT provisions; and Any capital gain arising under the CGT provisions, but calculated w/o
regard to indexation – ignore capital losses.
ALSO refer pg 13-30 for summary of assessability of types of distribution
Loans and Payments by Private companiesPLS 12-71
Remuneration and Termination PaymentsSec 109 If a private company pays or credits to an associated person an amount
that is, or purports to be: Remuneration for services rendered by the associated person; or An allowance, gratuity or compensation in consequence of the
retirement of the associated person from an office or employment held by the associated person in the company, or upon the termination of such office or employment;
So much of the excessive amount as exceeds an amount that, in the opinion of the commissioner, is reasonable: Is not an allowable deduction; and Shall be deemed to be a dividend paid by the company.
Off Market share buy-backsSec 159GZZZP(1) Where a company makes an off-market buy-back, the amount that is
taken to be a dividend paid by the company is the difference between: The purchase price; and Part of the purchase price in respect of the buy-back of the share
which is debited against amounts standing to the credit of the share capital account of the company;
Where a company makes an off-market share buy-back, the dividend is taken to have been paid: To seller as a s/holder in the company; and Out of profits derived by the company.
The amount taken to be dividend is included in the assessable income of the s/holder under s44(1).
CGT Consequence:
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Sec 159GZZZQ(4)
The full buy-back is treated as consideration for the sale of the shares. However, purchase price is reduced by the reduction amount.
Reduction amount is worked out as:a) that part of the buy-back price that is taken to be a dividend; andb) of those amount, only amounts that are:
included in the seller’s assessable income; or are eligible non-capital amounts – as this amount is not paid out of
share capital or ARR, are reduction amounts.
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FOREIGN INCOME, DEDUCTIONS AND CREDITS
Foreign IncomeSec 6AB Defines ‘foreign income’ – refer pg 16-4
Sec 160AE(2) Capital gains:Profits or gains of a capital nature derived from a foreign source are included in a resident’s income, and in respect of which foreign tax is payable, are deemed to be income having a source in the foreign country.This means that taxpayer would qualify for tax credit.
Sec 23(r)Sec 23AF
Sec 23AG
Sec 23AHSec 23AI/23AKSec 23AJ
Foreign Income exemptions: income derived by NR from NR sources; exemption for income earned by Australian residents working
overseas on approved aid projects foreign salary or wages income earned during a period of at least 91
days continuous service that is subject to tax in the source country exemption for foreign branch profits of Australian companies exemption for amounts paid out of attributed income; and exemption for certain non-portfolio dividends from foreign countries.
Sec 160AF(7)
Sec 160AF(8)
Sec 160AF(7)Sec 160AEASec 160AE(4)Sec 27CAA
Sec 160AFD(8)
Classes of foreign income:For purposes of determining availability of FTC, foreign income is split into 4 classes.
When you are determining foreign losses and deductions against foreign income, foreign income is also divided into 4 classes.
4 classes of foreign source income for which FTC is available: passive income (eg. dividends, interest, royalties, annuities, rents, etc) offshore banking income lump sum payments from eligible NR non-complying super funds
which are assessable other income.
There are 4 classes of foreign source income which are quarantined to determine net foreign income: interest income modified passive income – ie. passive income w/o interest income offshore banking income other income.
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Sec 79D
Sec 79DA
Foreign deductions to offset foreign income:Foreign deductions must be offset against assessable foreign income of a particular class and cannot be offset against Australian sourced income.
Unapplied foreign income deductions/loss is quarantined and is available to be carried forward to a subsequent year to be offset against future foreign income of the same class.
Election:An election can be made to offset the domestic loss against the foreign income. BUT don’t do this because you need to maximise foreign tax credits and domestic losses can then be carried forward.
Foreign LossesSec 79D
Sec 79DA
Foreign deductions to offset foreign income:Foreign deductions must be offset against assessable foreign income of a particular class and cannot be offset against Australian sourced income.
Unapplied foreign income deductions/loss is quarantined and is available to be carried forward to a subsequent year to be offset against future foreign income of the same class.
Election:An election can be made to offset the domestic loss against the foreign income. BUT don’t do this because you need to maximise foreign tax credits and domestic losses can then be carried forward.
Sec 160AFD
Sec 79D
Foreign losses may offset ONLY against assessable foreign income.
Foreign loss incurred in one year cannot be deducted from DOMESTIC assessable income of same year, nor can it be carried forward and offset against domestic assessable income of subsequent years.
Foreign Tax CreditsSec 160AF
Sec 160AF
Where: assessable income of a resident taxpayer includes foreign income; and taxpayer has paid foreign tax in respect of the foreign income and was
personally liable for it;the taxpayer is entitled to a credit of: amount of foreign tax, reduced in accordance with any relief available
to taxpayer under the law relating to the tax; OR amount of Australian tax payable in respect of the foreign income,WHICHEVER IS LESS.
Foreign tax is calculated as: any ‘direct’ credit for foreign tax paid on foreign income (eg. WHT);
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plus any indirect credit for underlying tax – eg. company that receives
foreign dividends from a related company taken to have paid company tax on the dividends.
Sec 160AFC(2)Credit for underlying foreign tax:Dividends received by Australian companies from related foreign companies are grossed up in respect of the underlying tax. The company then gets a credit for the tax gross up and any WHT paid.
Formula to calculate credit: refer pg 16-10
Australian tax payable:Formula on pg 16-13
Sec 160AFE(1)
Sec 160AFE(1D)
Excess FTC:Australian taxpayers can carry forward, for up to 5 years, any excess FTC for application against tax payable on foreign income of the same class.
Companies are entitled to transfer excess FTC to another company in the same company group provided: income company has, in the current year, derived income of the same
class to which the transferable excess credit relates; income company is a group company (ie. 100% ownership) in relation
to the credit company in the current year; and both companies agree in writing before lodgement of income
company’s ITR.
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FRINGE BENEFITS TAX (All Sections in FBTAA)
FBT liability calculationSec 136AA Fringe benefits taxable amount = Aggregate fringe benefit amount x
1.9417 (ONLY from 1/4/96)
Aggregate FB amount = value of benefits provided – value of exempt benefits – value of benefit exclusions – recipient’s contribution.
Sec 5C(2); TR 2000/D8 From 2000/01 FBT year:Need to calculate FB taxable amount by classifying fringe benefits into two types: Employers type 1 aggregate FB amount – where a GST input tax
credit is available to the provider Employer’s type 2 aggregate fringe benefits amount – where a GST
input tax credit is not available to the provider.
Sec 5C(3)
Sec 149A
Sec 5E(2)
Sec 5E(3)
Type 1 Aggregate fringe benefits amount:1) Identify the FB for each employee that are GST-creditable benefits
and work out for each employee their ‘individual fringe benefits amount for the year
2) Add up all individual fringe benefits amount3) Identify the excluded fringe benefits for the year for each employee
that are GST creditable benefits and add up their taxable values4) Add up total of 2 and 3.
GST-creditable benefits:A benefit is a GST creditable benefit if either of the following is, or was entitled to an ITC because of the provision of the benefit: Person who provided the benefit; Person who is or was member of the same GST group as the person
who provided the benefit.
Individual fringe benefits amount:The sum of the employee's share of the taxable value of each fringe benefit that relates to the year of tax and is provided in respect of the employment other than an excluded fringe benefit.
What is an excluded fringe benefit? A fringe benefit:
a) provision of meal entertainment; or
b) car parking fringe benefit; or
c) entertainment facility leasing expenses; or
d) various remote area benefits; or e) whose taxable value is reduced under section 60 (about remote area
housing); or f) that is an amortised fringe benefit (see subsection 136(1)); or
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Type 1 aggregate fringe benefit amount is multiplied by factor of 2.1292
Sec 5C(4)
Type 2 aggregate fringe benefit amount:One where provider not entitled to a GST ITC. Eg. food, health insurance, overseas travel, education (GST free items); mortgage payments, residential rents (input taxed items).Applies to situations where: FB provided by taxable value determined before intro of GST FB are GST free Goods or services are not acquired by employer (eg. manufactured) Small business employers who opted not to register for GST Activities of certain registered employers are input taxed.
For all fringe benefits amount which is not GST creditable benefits:1) Identify the FB for each employee that are not GST-creditable
benefits and work out for each employee their ‘individual fringe benefits amount for the year
2) Add up all individual fringe benefits amount3) Identify the excluded fringe benefits for the year for each employee
that are not GST creditable benefits and add up their taxable values4) Add up total of 2 and 3.
Type 2 aggregate fringe benefit amount is multiplied by factor of 1.9417
Sec 5B(1E)Aggregate non-exempt amount:For employers who provide exempt benefits under s57A (ie. government body, public hospital)Refer pg 19-9 for calculation method
Fringe Benefits Taxable Amount = (Type 1 aggregate fringe benefits x 2.1292) + (Type 2 aggregate fringe benefits x 1.9417)+ Aggregate non-exempt amount
Fringe benefits tax payable = Fringe benefits taxable amount x 48.5%
Rebatable EmployersSec 65J(1) Refer to p 19-12 for list of rebatable employers (those who cannot claim
deduction for FBT paid, eg. religious institutions, non-profit org)
What is a Fringe Benefit?Sec 136 Need to satisfy certain conditions outlined pg 19-17 (eg. must be a
benefit, provided in the year, provided to employee, etc)
Sec 136(1)(f)
Sec 136(1)(g) to (q)
Exclusions:Salary and wages (per PAYE definition) are excluded from being fringe benefits.
Other exclusions – refer pg 19-19
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Sec 136(1)Is there a benefit?Benefit is defined – refer pg 19-20
Sec 148Benefit provided in respect of employment of employee:Deems benefit to be provided in respect of employment, irrespective of whether: Benefit provided relates to other matter or thing Employment is past, present or future Benefit is surplus to needs of employee Benefit also provided to another person Benefit offset by any inconvenience or disadvantage Benefit required to be sued in employee’s employment Benefit provided is in nature of income Benefit provided as reward for services rendered or to be rendered.
Car Fringe BenefitSec 7(1) A car fringe benefit is provided if, on any day, a car is held by an
employer, an associate of the employer, or person under an arrangement with the employer or associate: Is applied to private use by an employee or associate of the employee; Is taken to be available for private use of the employee or associate.
Sec 136(1)Is there a ‘car’?Car is a MV, including a 4WD, that is: A motor car, station wagon, panel van, utility truck or similar vehicle
designed to carry a load of less than 1 tonne; or Any other road vehicle designed to carry a load of less than 1 tonne or
fewer than 9 passengers;BUT does not include a motor cycle or similar.
Sec 162(1)Car held by employer:Holding of a car exists where car is owned by employer or otherwise available to it.
Sec 136(1)
MT 2027
Private use of car:Private use is any use of the MV by employee or associate, that is not exclusively in course of producing assessable income of the employee.
Private use includes home to work travel BUT there are some exceptions (eg. employment duties of itinerant nature, home is a place of work, etc)
Sec 7(2)
Sec 7(3)
Available for private use:Car is available for private use where: Car is garaged at or near employee’s residence or of an associate of
employee; Car is not at employer’s, associate’s or arranger’s business premises
and any of the following conditions are satisfied: Employee entitled to apply car to private use Employee not performing duties of employment and has custody
or control of the car;
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MT 2027
An associate of employee is entitled to use, or has custody or control of, the car.
Prohibition by employer of use of the car which is not consistently enforced will mean car is available for private use.
Sec 8(2)
Sec 8(3)
Exempt car benefits: Certain commercial cars – ie. taxi, panel vans or utilities or any other
vehicle designed to carry load <1tonne provided vehicle not principally designed to carry passengers. PROVIDED only private travel is ‘work-related’ (ie. home to work travel) and non-work related travel is minor, infrequent or irregular.
Unregistered cars principally used in connection with employer’s business.
Sec 9Sec 10
Taxable value of car fringe benefits:Calculated by: Statutory formula method – refer pg 19-28 Operating cost method – refer pg 19-31
Debt Waiver BenefitSec 14 Debt waiver benefit arises where an employer releases an employee from
a debt.
Sec 15Taxable value of debt waiver benefit:Is the amount waived.
Loan BenefitsSec 16(1) Where an employer makes a loan to the employee
Taxable value of loan fringe benefit:Amount by which notional interest rate > actual interest accrued on loan
Sec 136(1)
Sec 16(2)Sec 16(3)-16(4)
What is a Loan benefit?A loan consists of: Advance of money; Provision of credit Payment made on behalf of employee where there is an obligation to
repay employer Any other transaction that is a loan in substance Debt of employee which is past due for payment Deferred interest where interest accrues on loan yet is not payable at
least every 6 months. The deferred interest component gives rise to a new loan.
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Sec 17(1)-17(2)Sec 17(3)Sec 17(4)
Exemptions: Arm’s length loan made by employer in business of lending Various advances to meet employment related expenses (conditions:
expenses will be incurred within 6 months of making loan, amount of loan does not substantially exceed the level of expected expenses and employee required to a/c to employer within 6 months of expenses met and repay unused amount)
Advances repayable within 12 months if for temporary accommodation where various conditions are met (eg. sole purpose of loan is to enable employee to pay security deposit on accommodation).
Taxable value of loan benefits:Refer pg 19-37
Sec 19
TD 93/90
Otherwise deductible rule:Where recipient is an employee the taxable value may be reduced where employee uses all or part of the loan for income-producing purposes. Conditions: Loan provided to employee [Rule DOES NOT apply if loan made to
an associate of the employee]. Employee would have been entitled to a ONCE ONLY deduction in
respect of interest on the loan, had the employee been required to pay interest;
Employee to provide to employer with declaration – ie. indicating log book and odometer records have been kept.
[refer pg 19-38 for calculation]
Expense Payment Benefit
Sec 20(a)Sec 20(b)
IT 2614; TR 92/15
Expense payment benefit arises when: Employer pays expenses incurred by an employee Employer reimburses expenses incurred by an employee
Reimbursement v. Allowances:Reimbursement assumes that an employee is to be compensated exactly for an expense already incurred although not necessarily disbursed.Allowance is where an employer pays an employee an estimated future expenditure – EXCEPT advance payment may still be reimbursement if employee required to substantiate expense and excess returned to employer.
Sec 20ASec 21Sec 22
Exemptions: Non-private use declaration Accommodation expenses Car expenses reimbursed on cents per kilometre basis.
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Taxable value of expense payment benefit:Refer pg 19-41
Housing BenefitSec 25
Sec 136(1)
Where an employer grants an employee a housing right, for more than 1 day, as a usual place of residence.
Housing right is a lease or licence granted to a person to occupy or use a unit of accommodation where it represents the person’s usual place of residence.
Sec 58
Sec 58ZC
Exemption:Employees of government, religious institutions, or non-profit bodies who provide live in care for the elderly, mentally or physically handicapped, or those in necessitous circumstances.
Remote area housing benefits exempted from FBT from 1/4/00.
Taxable value of housing rightsRefer pg 19-44
Living Away From Home Allowance BenefitSec 30 Arises when the employer pays an employee an allowance for additional
expenses for disadvantages suffered due to living away from his/her usual place of residence for employment purposes.
Taxable value of LAFHA:Refer pg 19-48
Car Parking BenefitSec 39A Car parking exists when:
It is in relation to a daylong period ie. between 7am and 7pm A car must be parked on business premises or associated premises
which are within 1km of a commercial parking station; There must be a commercial parking station located within 1km of
employer-provided carpark and the lowest fee charged by the operator for such commercial parking station in the ordinary course of business to members of the public for all-day parking on the first business day of the FBT year is more than the car parking threshold.
Expense payment:Where the employee leases the car space and is then reimbursed by the employer, the car space would not be associated premises of the employer and an expense benefit will instead arise under s20. BUT may be exempt under s58G
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Sec 58G(1)Sec 58G(2)
Sec 58G(3)
Sec 58GA(1)
Exemptions: Residual benefits and certain expense payment benefits Benefits provided by certain non-profit bodies and public educational
institutions Benefits provided by govt. public educational institutions Minor benefits Benefits exempted by regulations, eg. disabled persons.
For small business employers, a car parking benefit provided in respect of the employement is an exempt benefit if: Car is not parked at commercial parking station; and Employer of employee is not a public company or a subsidiary of a
public company, in relation to the day on which the benefit is provided; and
The employer is not a government body; and The sum of the employer’s ordinary income and statutory income for
the year of income ending most recently before start of the FBT year is <$10m.
NOT EXEMPT if employee’s car is parked at a commercial parking station.
Sec 39CSec 39DSec 39DA
Sec 39FASec 39GA
Taxable value of car parking benefits: Commercial parking station method Market value method Average cost methodFor EACH car parking benefit provided, then to calculate the total taxable value: Statutory formula 12 week record keeping method
Refer pg 19-53
Property BenefitsSec 40 Arise where employer provides property of any type (eg. goods, real
property, shares and other securities or rights) to the employee.(can be either in-house or external property benefits)
Sec 62Exemption:A general exemption of $500 of the taxable value of in-house property benefits exists for each recipient employee for each year.
Taxable value of property benefit:Refer pg 19-59
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Residual BenefitsSec 45 Arise on provision of benefits by employer to employee that meet the
criteria of fringe benefits but are not otherwise specified.
Exemptions:Refer pg 19-62
Taxable value of residual fringe benefit:Refer pg 19-63
EntertainmentSec 37AD
Sec 37AD
TR 97/1
Meal entertainment benefit consists of:a) entertainment by way of food and drink;b) travel or accommodation connected with (a); orc) reimbursement or payment of expenses incurred in providing (a) or
(b).
NOTE: It is still meal entertainment: if business discussions or business transactions occur; if in connection with the working of overtime or otherwise in
connection with the performance of the duties of any office or employment;
for the purpose of promotion or advertising; or at or in connection with a seminar.
Tests for determining whether the provision of food and drink amounts to meal entertainment are:1. Why is the food and drink being provided? 2. What food and drink are being provided? If it is a function held at a
restaurant, it will be considered to be entertainment. As per IT 2675, food and drink consumed off employer premises at a social function constitutes meal entertainment.
3. When is it provided? The benefit was provided outside work hours, or during work hours.
4. Where is it provided? At a restaurant off business premises, more likely to be considered entertainment.
Sec 37BSec 37C
Taxable value of entertainment benefit: 50/50 split method 12 week register method[Refer pg. 19-65]
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Other BenefitsSec 32Sec 35
Airport Transport Benefits – pg 19-66Board Fringe Benefits – pg 19-66
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