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LWB364 Taxation Law

Semester 1 - 2010

Matthew Robinson

Index

Page

INTRODUCTION TO TAXATION LAW...........................................................................................................5

1. TAX SYSTEM.................................................................................................................................................52. THE ADMINISTRATIVE SYSTEM.....................................................................................................................5

INCOME TAX........................................................................................................................................................7

1. INTRODUCTION..............................................................................................................................................72. RESIDENCE....................................................................................................................................................7

2.1. Essentials..............................................................................................................................................72.2. Is <Taxpayer> an Australian resident?...............................................................................................7

3. WHAT INCOME IS ASSESSABLE?..................................................................................................................113.1. General rule: Is it ordinary income?..................................................................................................113.2. How to determine ordinary income from first principles...................................................................113.3. Personal exertion................................................................................................................................133.4. Income from property.........................................................................................................................153.5. Business..............................................................................................................................................163.6. Is it statutory income?........................................................................................................................243.7. Is it exempt income?...........................................................................................................................243.8. Non-assessable, non-exempt income?................................................................................................243.9. Conflict rules / double counting.........................................................................................................24

4. DERIVATION OF INCOME.............................................................................................................................255. SOURCE OF INCOME....................................................................................................................................26

5.1. Introduction........................................................................................................................................265.2. Source Rules.......................................................................................................................................26

6. ALLOWABLE DEDUCTIONS..........................................................................................................................286.1. General deductions.............................................................................................................................286.2. Specific Deductions............................................................................................................................36

CAPITAL GAINS TAX.......................................................................................................................................45

1. KNEECAPS...................................................................................................................................................452. STATUTORY INCOME...................................................................................................................................463. HAS THERE BEEN A CGT EVENT?...............................................................................................................46

3.1. What event?........................................................................................................................................464. IS <ASSET> A CGT ASSET?.........................................................................................................................47

4.1. Definition of CGT Asset......................................................................................................................474.2. Collectable assets...............................................................................................................................474.3. Personal use assets.............................................................................................................................48

5. TIMING & CALCULATION............................................................................................................................485.1. Acquisition date generally..................................................................................................................485.2. A1........................................................................................................................................................495.3. C1........................................................................................................................................................495.4. D1.......................................................................................................................................................495.5. F1........................................................................................................................................................505.6. I2.........................................................................................................................................................50

6. IS THERE AN EXEMPTION / SPECIAL RULES?...............................................................................................506.1. Certain assets.....................................................................................................................................506.2. Main residence...................................................................................................................................516.3. Deceased estates.................................................................................................................................576.4. Deemed separate assets......................................................................................................................586.5. Marriage breakdown..........................................................................................................................58

7. CAPITAL PROCEEDS....................................................................................................................................60

Matthew Robinson LWB364 Introduction to Taxation Law 1

7.1. General rule........................................................................................................................................607.2. Modification........................................................................................................................................60

8. COST BASE..................................................................................................................................................618.1. Ordinary cost base..............................................................................................................................618.2. Reduced cost base...............................................................................................................................638.3. Is indexation available?......................................................................................................................638.4. Discount..............................................................................................................................................638.5. Discount v indexation comparison.....................................................................................................63

9. ANTI-OVERLAP PROVISIONS........................................................................................................................6410. CGT CALCULATION..................................................................................................................................64

GOODS AND SERVICES TAX..........................................................................................................................65

1. IS <TAXPAYER> REQUIRED TO BE REGISTERED?........................................................................................651.1. Carrying on an enterprise..................................................................................................................651.2. Turnover threshold.............................................................................................................................65

2. IS IT A TAXABLE SUPPLY?..........................................................................................................................662.1. Did <taxpayer> make a supply?........................................................................................................662.2. Was the supply for consideration?.....................................................................................................662.3. Was it made in the furtherance of an enterprise the taxpayer carries on?........................................672.4. Is there a connection to Australia?.....................................................................................................672.5. Is the taxpayer registered/required to be registered?........................................................................682.6. The supply is not GST-free or input taxed..........................................................................................68

3. GST PAYABLE.............................................................................................................................................694. IS IT A CREDITABLE ACQUISITION?............................................................................................................69

4.1. Acquisition..........................................................................................................................................694.2. Creditable purpose.............................................................................................................................704.3. It is a taxable supply...........................................................................................................................704.4. You provide consideration..................................................................................................................70

5. INPUT TAX CREDITS....................................................................................................................................706. TOTAL GST LIABILITY................................................................................................................................70

FRINGE BENEFITS TAX...................................................................................................................................71

1. HISOTRY......................................................................................................................................................712. FRINGE BENEFIT & <TAXPAYER>’S ASSESSABLE INCOME..........................................................................713. LIABILITY TO PAY.......................................................................................................................................714. IS THERE A FRINGE BENEFIT?......................................................................................................................71

4.1. Benefit.................................................................................................................................................714.2. Excluded benefits................................................................................................................................714.3. Provided during the FBT year............................................................................................................724.4. Provided by employer, associate, 3rd party arranger.........................................................................724.5. Provided to an employee or an associate of the employee.................................................................724.6. In respect of the employment of the employee....................................................................................72

5. WHAT IS THE TAXABLE VALUE OF THE FRINGE BENEFIT?..........................................................................735.1. Taxable value......................................................................................................................................735.2. Reductions..........................................................................................................................................73

6. FBT LIABILITY............................................................................................................................................746.1. Fringe benefits provided.....................................................................................................................746.2. Grossing up.........................................................................................................................................746.3. Total FBT Liability.............................................................................................................................74

7. DEDUCTIBILITY OF FBT.............................................................................................................................748. ADMINISTRATIVE ISSUES............................................................................................................................74

OTHER CLASSES OF TAXPAYER..................................................................................................................76

1. PARTNERSHIPS............................................................................................................................................761.1. Does a partnership exist?...................................................................................................................761.2. Interest in profit/loss...........................................................................................................................761.3. Calculation.........................................................................................................................................77

2. TRUSTS........................................................................................................................................................782.1. Types of trust......................................................................................................................................782.2. Net income of the trust (NITE)...........................................................................................................782.3. Who is taxed?......................................................................................................................................792.4. Transfers of losses..............................................................................................................................82


2.5. Anti-avoidance....................................................................................................................................823. COMPANIES.................................................................................................................................................83

3.1. General rules......................................................................................................................................833.2. Residency............................................................................................................................................83

TAX EVASION AND TAX PLANNING...........................................................................................................85

1. TAX PLANNING V AVOIDANCE....................................................................................................................852. ANTI-AVOIDANCE PROVISIONS....................................................................................................................853. MITIGATING UNCERTAINTY........................................................................................................................864. Examples....................................................................................................................................................86


General process for answering general questions


Introduction to Taxation Law

1. Tax systemTax is a compulsory levy of money that doesn’t directly (or possibly indirectly) confer a benefit.

Taxes can be either direct or indirect. Direct taxes are imposed directly on a person, whereas indirect taxes are not.

Taxes may be either progressive or regressive. Progressive taxes are those that a positively correlated with the money a person earns, whereas a regressive tax is not necessarily correlated with a person’s income.

A ‘good’ taxation system should aim to achieve simplicity, equity, and economic growth.

Section 53 of the Constitution only permits the House of Representatives to pass and amend tax legislation.

Due to section 55 of the Constitution, the tax scheme is divided into separate pieces of legislation: Income Tax Assessment Act 1936 (Cth) (ITAA 1936);

Income Tax Assessment Act 1997 (Cth) (ITAA 1997) – this act has a pyramid structure, but is incomplete because of a lack of funding;

Income Tax Rates Act 1986 (Cth) (ITRA)

Taxation Administration Act 1953 (Cth) (TAA)

Features of the ITAA 1997: Pyramid structure – core provisions at the front of the legislation

Robust numbering system

Asterisk for defined terms

Explanatory guides before Divisions

Method Statements (see sec 4-15)

Plain English

Diagrams (see s 6-1)

2. The administrative systemThe ATO has a national office in Canberra, and branch offices in each State & Territory.

The ATO is headed by the Commissioner of Taxation, who has the power of administration of the tax acts (TAA s 3A and ITAA 1936 s 8).

There are Second Commissioners (s 4), Deputy Commissioners (s 7) and Assistant Commissioners.

The power of the Commissioner may be delegated (and the delegate can act in their own name), and authorised (a person may be authorised by the delegate to exercise power in the name of the delegate).

The rulings system, is not delegated legislation, however it has some binding effect. A ruling may be relied upon in good faith by a taxpayer – ie a taxpayer cannot be prejudiced by reliance. However, the ruling is not binding upon a taxpayer who does not comply with it.


There are public rulings (Division 358 Schl 1 TAA) and private rulings (Division 359 Schl 1 TAA).

Public rulings regard matters of general tax interest and uses a sequential numbering system – ie TR 2008/1.

Private rulings apply to taxpayer specific issues. They are published on the ATO website as an edited version.


Income Tax

1. IntroductionIncome tax must be paid for each financial year (ITAA 1997 s 4-10(1)).

Income tax is calculated as: Income Tax = (Taxable Income x Rate) – Tax Offsets (ITAA 1997 s 4-10(3)).

A persons taxable income is: Taxable Income = Assessable Income –Deductions (ITAA 1997 s 4-15(1)).

2. Residence

2.1.EssentialsThe assessable income of an Australian resident includes the ordinary income derived by the taxpayer, directly or indirectly, form all sources, whether in or out of Australia, during the income year (ITAA 97 s 6-5(2)). Assessable income also includes statutory income (ITAA s 6-10).

The assessable income of a non-resident includes:

Ordinary income derived directly or indirectly from all Australian sources during the income year (ITAA 1997 s 6-5(3)(a));

Other ordinary income that a provision includes in your assessable income for the income year on a basis other than having an Australian source (ITAA 1997 s 6-5(3)(b));

Statutory income derived from all Australian sources (ITAA 1997 s 6-10(5)(a));

Other statutory income that a provision includes in your assessable income for the income year on a basis other than having an Australian source (ITAA 1997 s 6-10(5)(b)).

2.2. Is <Taxpayer> an Australian resident?The residence of <Taxpayer> is determined from year-to-year (ITAA 1997 s 4-10).

Australian resident means a person who is an Australian resident under the ITAA 1936 (ITAA 1997 s 995).

ITAA 1936 s 6(1) enunciates 4 tests of residency:

common law test of residency;

domicile test (ITAA 1936 s 6(1)(a)(i));

183 day test (ITAA 1936 s 6(1)(a)(ii));

superannuation test {unlikely to need} (ITAA 1936 s 6(1)(a)(iii)).

Here, because the issue is whether <Taxpayer> has become a resident (from a non-resident), we must satisfy either the common law test or 183 day rule.

Here, because the issue is whether <Taxpayer> has ceased to be a resident (was previously a resident) we must satisfy either the common law test or domicile test.


(a) Common law test of residency {Incoming or outgoing}

The common law test of residence relies on the ordinary meaning of ‘reside’ to determine residency. TR 98/17 at [14] adopts the dictionary definition of reside, being to dwell permanently or for a considerable time, or to be settled, or have ones usual place of abode in a particular place.

Residency is a question of fact and degree (TR 98/17 at [9]).

Events after the financial year may assist in determining residency status (FC of T v Applegate (1979) 9 ATR 899).

The Commissioner considers 6 months to be a considerable amount of time for the purposes of this test, but this is not determinative (TR 98/17 at [22]).

Relevant factors may include:

physical presence in Australia (TR 98/17 at [18])

frequency, regularity and duration of visits

intention and purpose of visit (TR 98/17 at [20]) – if the intent is to stay less than 6 months, but is extended beyond that, they are considered residents from their arrival (at [25])

maintenance of a home in Australia during absences (TR 98/17 at [20])

family and business ties in a particular country (TR 98/17 at [20])

present habits and way of life (TR 98/17 at [20])

nationality

Levene v IRC [1928] AC 217The taxpayer lived in London from 1918 – 1920. The taxpayer then sold house and floated around UK – then lived overseas & UK until 1925. Where was his usual place of abode? Was not a resident until he signed a lease. Relevant factors included maintaining ties with the UK, purpose of travels, intent to return to UK, etc.

IRC v Lysaght [1928] AC 234

(b) Domicile test {outgoing}

(i) Preliminary

<Taxpayer> is a resident if their domicile is Australia, unless the Commissioner is satisfied that their permanent place of abode is outside Australia (ITAA 1936 s 6(1)(a)(i)).

A person may have domicile by origin {father’s domicile at time of birth}, choice or operation of law.

Here, <Taxpayer>’s domicile is Australia, so we must determine whether they have a permanent abode outside Australia.

Here, <Taxpayer> has chosen to permanently reside in <country>, meaning that he/she is not an Australian resident on this test (FC of T v Applegate).

(ii) Abode outside Australia?


<Taxpayer> will not be a resident if the Commissioner is satisfied that they have a permanent place of abode outside Australia.

The ordinary meaning of abode is a person’s home/residence.

This does not require an intention to move forever, however it must not be transitory (Applegate).

A stay for a fixed term in another country does not prevent it from constituting a permanent place of abode (FCT v Jenkins).

Per IT 2650 at [23], relevant factors may include:

Intented and actual length of stay – 2 years is likely to constitute a permanent place of abode, whereas less than 2 years is likely to be considered transitory.

Abandonment of place of abode in Australia

Acquisition of place of abode outside Australia

Intention to make place of abode 'home'

Nature and quality of use made of place of abode

Duration and continuity of presence in place

Durability of association (ties) with place

Here, <Taxpayer> [does OR does not] have a permanent place of abode outside Australia.

(iii) Conclusion

Here, <Taxpayer> [is OR is not] a resident of Australia.

FC of T v Applegate 79 ATC 4307Facts: A solicitor set up a new firm in Vanautu, with the intention of staying indefinitely. He gave up leased property in Australia and leased a home in Vanautu. He still retained life insurance etc in Australia. His wife returned to Australia. The Commissioner argued that the solicitor did not have a permanent place of abode outside of Australia.Held: The court held that permanent place of abode did not require a permanent move (because otherwise it would have been domicile by choice), thus permanent meant something less than forever. There must be a strong connection, but it need not be forever.

FC of T v Jenkins 82 ATC 4098The taxpayer was an employee of a bank, and had been transferred overseas for a period of 3 years. He returned after only 18 months due to ill health. The taxpayer had unsuccessfully tried to sell his house prior to leaving Aus, so instead rented it, having an Aus bank account to collect rent. The bank paid for storage of his furniture.It was held that the Taxpayer did have an abode outside of Australia.

(c) 183 day test {incoming}

A person will become a resident if they have been in Australia for more than half the year (183 days), unless:

their usual place of abode is outside Australia; and

they do not intend to take up residence.


(ITAA 1926 s 6 (1)).

The 183 days must be in the income/financial year.

The 183 days may be continuous or intermittent.

It is uncertain whether you become a resident for the whole, or only part of the year (see text at 24-056).

Usual abode

Usual abode may be something less than permanent.

The ordinary meaning of abode is a person’s home/residence.

Per IT 2650 at [23], relevant factors may include:

Intented and actual length of stay – 2 years is likely to constitute a permanent place of abode, whereas less than 2 years is likely to be considered transitory.

Abandonment of place of abode in Australia

Acquisition of place of abode outside Australia

Intention to make place of abode 'home'

Nature and quality of use made of place of abode

Duration and continuity of presence in place

Durability of association (ties) with place

Here, <Taxpayer> [does OR does not] have a usual place of abode outside Australia.

(d) Superannuation test

The superannuation test applies to a(n):

Member of Superannuation scheme est. by deed under the Superannuation Act 1990; or

eligible employee for the purposes of the Superannuation Act 1976; or

spouse, or child under 16 covered by points 1 and 2 above.

This covers people such as embassy staff overseas.


3. What income is assessable?A person’s income is comprised of ordinary and statutory income (ITAA97 s 6-1).

Process for determining whether it is assessable income:

1 Is the income ordinary income?

2 Is the income statutory income (ie does a specific assessing provision apply)?

3 Is it exempt income? {ie through specific provision or residence & source rules}

4 If it does not fit into any of these, it is non-exempt, non-assessable income.

3.1.General rule: Is it ordinary income?Assessable income includes ordinary income derived from [all sources {for Australian residents} OR Australian residents {for foreign residents}] (ITAA97 s 6-5).

Ordinary income is determined according to the ordinary concepts and usages of mankind (ITAA s 6-1; Scott v C of T (NSW)). According to this concept, income is seen as a flow, but not the proceeds from the sale of an asset (Eisner v Macomber).

3.2.How to determine ordinary income from first principlesWhere the receipt does not fit within an established category, we must examine a range of factors to determine whether it is ordinary income.

(a) Regularity

Ordinary income will ordinarily exhibit periodicity, recurrence and regularity (FCT v Dixon {The taxpayer’s employer agreed to pay staff the difference between what their normal wage and what they earned in the armed forces. The payment was voluntary on the part of the employer. The court held that the payments were ordinary income because they were regular, periodic and the taxpayer relied upon them for his livelihood}; Keily v FCT {aged pension is income}).

Regularity is not decisive (Kelley v FCT {The taxpayer received a prize for best and fairest. Despite being irregular, the court held that the income was ordinary income because the taxpayer was contractually obliged to pay his best at all times and this gave it a clear nexus with his employment}).

One-off lump sums from profit making schemes have been held to be income (FCT v The Myer Emporium Ltd). Conversely, periodic payments representing payment for the purchase price of capital have been held to be capital in nature (Foley Fletcher).

Here, ________________.

(b) Nexus with earning activity

An receipt will usually be ordinary income if it has a nexus with an earning activity.

As such, windfall gains and gifts will not have a sufficient nexus.

An expectation of receipt may aid in establishing the nexus.

{see issues with voluntary payments at below}

Here, _________________.

(c) Comes to the taxpayer beneficially

The receipt must ‘come in’ to the taxpayer beneficially (Tennant v Smith).


Savings will not constitute an incoming receipt (Tennant v Smith {The taxpayer’s employer rented an apartment, which the taxpayer lived in. The court held that this constituted a saving, and did not constitute a flow that comes in to the taxpayer.}).

A reduction in liability does not constitute ordinary income as it does not come in to the taxpayer (International Nickel Australia Ltd v FC of T).

Amounts subject to a contingency do not come into the taxpayer beneficially (Case R107).

In the course of business, saved expenditure may constitute income (FCT v Unilever Australia Securities Ltd).

{Possibly look at fringe benefits.}

(d) Money or money’s worth

Under the common law the receipt must be money or money’s worth (Tennant v Smith).

Case examples:

Tennant v Smith: The accommodation provided by an employer was not convertible into money because the taxpayer could not sell convert the benefit into money.

FCT v Cooke and Sherden: A soft drink manufacturer gave away a holiday to encourage businesses to sell more soft drink. Because the tickets were not transferable, the tickets could not be converted into money and the tickets were therefore not money’s worth.

Payne v FCT: The taxpayer accrued frequent flyer points through work. This was held not to be money’s worth because it could not be converted into money.

Statutory modification

Section 21 ITAA36 deems non-cash benefits to be convertible into cash, at the value of the consideration provided.

Section 21A ITAA36 deems non-cash business benefits to be convertible into cash, at its arm’s length value.

Section 15-2 ITAA97 makes the value of benefits in respect of employment assessable income regardless of whether they are convertible into money {Statutory income}.

(e) Characterised in the hands of the recipient

The receipt must be characterised in the hands of the taxpayer, not by reference to another person or the expenditure that produced the receipt (Federal Coke Co Pty Ltd v FCT; FCT v McNeil).

The relevant time to assess the character is at the time it is received (Constable v FCT).

(f) Measured on a gross basis

The income is the gross receipt (ss 6-5, 6-10 & 6-15 ITAA1997 & FCT v James Flood Pty Ltd).


3.3.Personal exertion

(a) Wages and salaries

Income from personal exertion (such as salary and wages) are generally ordinary income (ITAA36 s 6(1); Dean & Anor v FCT).

There must be a connection between the receipt and the services rendered (FCT v Dixon).

(b) Voluntary payments

Voluntary payments may constitute ordinary income.

Where the receipt is incidental to employment, or the person is entitled by custom or employment contract, the amount will usually be income (Moore v Griffiths). {Christmas bonuses often fall into this category}

Tips have been held to be income despite not legal obligation (Calvert v Wainwright {Tips received by taxi driver}).

Key factors to consider are:

the degree of connection to employment or services rendered

reasonable expectation payment would be made

dependence upon payment to meet usual living expenses

payment replaces income

motive of the payer or donor (Hayes v FCT {not decisive})

periodical, concurrent and regular

money or convertible into money

Case examples:

Case S17: Prizes received from a quiz shoe because of a taxpayer’s skill and knowledge was held to be income.

Hayes v FCT: The taxpayer received shares for giving casual financial advice to the donor, after an employment relationship had ceased. This was held not to be income because it could not be related to any income producing activities and the taxpayer was not in the business of providing financial advice.

Scott v FCT: Solicitor received a gift from a client after many years of dealings. The receipt was not income because there was no link to services render, and was motivated by a personal relationship. It was irrelevant that the generosity was inspired by gratitude built up by services rendered.

FCT v Harris: A former bank employee received a one-off sum of $450 to off-set the effects of inflation on his pension. This was held not to be income.

Sporting case examples:

Moorhouse v Dooland: Professional cricketer was entitled under his contract to ‘collections’ from the crowd for very good performances, and received 11 in the year. This was held to be income.


Kelly v FCT: The taxpayer received a prize for best and fairest. Despite being irregular, the court held that the income was ordinary income because the taxpayer was contractually obliged to pay his best at all times and this gave it a clear nexus with his employment.

Moore v Griffiths: The taxpayer, a member of the UK soccer World Cup squad, was paid a bonus. The bonus was paid to all members of the squad regardless of performance or the number of games played. The Court held that it was not income because it was received after the performance of services, he did not know about it prior to the contract, it was not likely to re-occur and each player got the same regardless of performance.

Reed v Seymour: A cricket received an amount from a testimonial match. The court held this was not income because the money was given on personal grounds, it was given to express gratitude, and he was not entitled to the payment.

FCT v Stone: The taxpayer was a javelin thrower as well as a police officer. She claimed that prize money and grants were not subject to income tax because she was not carrying on the business of a professional athlete. The High Court held that the amounts were ordinary income, and her activities did constitute the operation of a business.

(c) Payments for restriction of rights (restraint of trade)

Generally, payments to restrict rights are of a capital nature (Beaks v Robson; Higgs v Olivier {paid not to appear in any movie for 18 months. this was held not to be income.}).

{Note possible CGT implications – CGT Event D1}

If the employment contract and restriction operate concurrently, it is more likely to be income (Riley v Coglan).

The substance of the agreement is examined; where the employment contract and restriction are interdependent, this indicates the payment is income (Case D38).

Restrictive covenants are more likely to be income if they are ordinary in the course of a profession (Higgs v Olivier; Case A14 {it was held to be common for professional footballers}; Cf Jarrold v Boustead {payment for rugby player to give up amateur status held to be a capital receipt})

The fact that the person is not obliged to pay the amount despite not performing services is an indicator of capital, but is not determinative (Woite {footballer undertook that he would not play AFL for any other club – but did not obliged to play for that club}).

The greater the burden on freedom, the more likely the payment is to be capital (Woite).

(d) Compensation payments

Compensation payments will take the form of the thing they replace (Van den Berghs Ltd v Clark; FCT v Dixon).

Here, the <thing being compensated> is in the nature of [income OR capital] so will be [income OR capital].


(e) Illegal / immoral receipts

Illegal or immoral receipts may be ordinary income {ie prostitution, drug smuggling, topless dancers} (Lindsay & Ors v Inland Revenue Commissioners)

However, deductions will not be allowed for illegal or immoral activities (ITAA97 s 26-54 {denies deductions for illegal activities}; FCT v La Rosa {tried to claim deductions for illegal or immoral activities}).

[Not sure the extent to which illegal activities are defined, and deductions denied for these]

(f) Mutual receipts

Receipts by body corporate or clubs from members are not income, because they are effectively paying money to themselves (The Bohemians Club v FCT).

(g) Capital in nature

Income of a capital nature is not ordinary income (Brent’s Case { ie The taxpayer signed a book deal that required a number of interview. The taxpayer claimed that it was a sale of capital, ie information, but the court held that this was income. Part of the reasoning was that the requirement to be interviewed equated to a performance of a service.}).

Here, the receipt is a capital gain and not ordinary income.

Here, the receipt is proceeds from the use of an asset, and therefore may be ordinary income.

3.4. Income from propertyIncome from holding property will often come within the concept of ordinary income.

Here, the receipt is income as it is:

Rent from the lease of property (Adelaide Fruit)

Interest

Dividends (ITAA36 s 44) {Statutory}

Royalties (ITAA36 s 6(1)) {Statutory}


3.5.Business

(a) Is <Taxpayer> carrying on a business?

A business includes any “profession, trade, employment, vocation or calling”, but is not occupation as an employee (ITAA97 s 995-1).

Whether a person carries on a business is a question of fact and degree, based on numerous factors (Evans v FCT).

(i) System and organisation of record keeping

An activity that is a business will generally be organised and have a system associated with it (Ferguson v FCT {A naval officer wanted to become a cattle farmer when he retired, so leased a couple of cows and was permitted to keep the calves they gave birth to. In doing so the taxpayer paid various expenses which he claimed as deductions. Despite only having 5 cows, and not being a big business, the taxpayer had systems and plans in place, so was held to be in business.}).

A system may be shown by:

use of accounting systems

expert advice

professional membership

use of methods and procedures similar to other businesses.

(ii) Scale of activities

A business generally operates on a scale beyond that of ordinary domestic needs (Rutledge v IRC {Taxpayer bought a large quantity of toilet paper, which he immediately sold at a profits. This was held to be a business because the toilet paper was of a quantity that would not be purchased for ordinary domestic needs, contrary to the argument of the taxpayer}).

However, the scale of the business is not decisive, and a person may conduct it on a small scale (FCT v Walker {The taxpayer wanted to go into the goat business. The taxpayer had a female goat, but was not good at breeding and many goats ended up dying, so that at any one time there was only ever 3 goats alive. The taxpayer earned some income, but lost much more, claiming these deductions. The court held that the Taxpayer was in the business of breeding goats because it was carried on in a business like way through, inter alia, agreements with vets, reading journals and joining of a goat society}).

(iii) Sustained, regular and frequent transactions

A business is usually expected to have regular transactions over a lengthy period of time.

However, the courts recognise that a business may go through ordinary periods of quiet.

However, a sufficiently large one-off transaction will be sufficient (FCT v Sheild {the taxpayer was employed with a finance company buying and selling shares. The taxpayer argued that he was not in a business because there were not sustained transactions. The court disagreed, holding that there was a business notwithstanding a lack of sustained transactions}).

(iv) Profit motive

Business is usually motivated by a profit motive, however the fact that a profit is or is not made is not decisive (Thomas v FCT {A barrister who worked full time planted fruit


and nut producing trees. This was a long-term project because Avocado and Macadamia trees take a long time to produce fruit or nuts. The trees ended up being planted on unproductive land and no income was ever possible. The commissioner argued that it was only a hobby and the taxpayer could not claim the losses. However the court held that it wasn’t a hobby, partly because the amount of fruit could not be used for domestic use. The fact that no profit was in fact available, did not prevent it from being a business}).

The absence of a profit motive is not decisive (FCT v Stone {Policewoman was also an Olympic athlete, who argued that athletics was undertaken for the enjoyment of it. She earned sponsorship. The court held that the taxpayer was in business despite no profit motive.}).

In Brackavich, the court held that the taxpayer was not in the business of gambling, and therefore not able to claim losses, despite having a profit motive, because inter alia, there were no records. The court found it irrelevant that the taxpayer had purchased a horse, because it believed that this was only to obtain inside information.

In Spriggs v FCT; Riddle v FCT, the High Court held that footballers were in the business of sport, because they were commercially exploiting their football prowess to make money {this allowed them to claim management fees as deductions}.

(v) Commercial character of transactions

A business will usually trade on the open market, on terms and conditions similar to other businesses.

However, some businesses are inherently different; one example is the art business (TR2005/1).

(vi) Characteristics or quantities of property / taxpayer

There will not be a business where the goods (or quantity thereof) are inherently unsuited to domestic use (Rutledge v IRC).

(vii) Inherent characteristics of the taxpayer

A company may not engage in a hobby.

(viii) Other

Illegal transaction can constitute a business (FCT v La Rosa {drug dealing}; Partridge v Mallandaine {illegal gambling})

Being employed does not prevent you from carrying on a business in another area

being compelled to do something does not prevent it from being a business

(ix) Common categories

A) Gambling

In Brajkobich, the court outlined 6 factors relevant in determining whether a person is in the business of gambling:

is it conducted in a systematic, organised and businesslike way

its scale (ie size of wins and losses)

whether the betting is related to other business-like activities (ie breeding horses)

a pleasure or profit motive


whether the form of betting involves skill and judgment or purely chance

whether the gambling activity in question is of a kind ordinarily thought of as a pastime or hobby.

Case examples:

Evans v FCT

In Brajkovich v FCT, the court held that the taxpayer was not in the business of gambling, and therefore not able to claim losses, despite having a profit motive, because inter alia, there were no records. The court found it irrelevant that the taxpayer had purchased a horse, because it believed that this was only to obtain inside information.

Trautwein: The taxpayer was held to be in the business of gambling because he owned a number of horses and kept very clear records.

Prince v FCT: Retired book-maker who gambled heavily was held to be in business.

B) Primary Production

Primary production: TR 97/11

Thomas v FCT {A barrister who worked full time planted fruit and nut producing trees. This was a long-term project because Avocado and Macadamia trees take a long time to produce fruit or nuts. The trees ended up being planted on unproductive land and no income was ever possible. The commissioner argued that it was only a hobby and the taxpayer could not claim the losses. However the court held that it wasn’t a hobby, partly because the amount of fruit could not be used for domestic use. The fact that no profit was in fact available, did not prevent it from being a business}

FCT v Walker {The taxpayer wanted to go into the goat business. The taxpayer had a female goat, but was not good at breeding and many goats ended up dying, so that at any one time there was only ever 3 goats alive. The taxpayer earned some income, but lost much more, claiming these deductions. The court held that the Taxpayer was in the business of breeding goats because it was carried on in a business like way through, inter alia, agreements with vets, reading journals and joining of a goat society}

Ferguson v FCT {A naval officer wanted to become a cattle farmer when he retired, so leased a couple of cows and was permitted to keep the calves they gave birth to. In doing so the taxpayer paid various expenses which he claimed as deductions. Despite only having 5 cows, and not being a big business, the taxpayer had systems and plans in place, so was held to be in business.}

C) Sports

FCT v Stone {Policewoman was also an Olympic athlete, who argued that athletics was undertaken for the enjoyment of it. She earned sponsorship. The court held that the taxpayer was in business despite no profit motive.}

In Spriggs v FCT; Riddle v FCT, the High Court held that footballers were in the business of sport, because they were


commercially exploiting their football prowess to make money {this allowed them to claim management fees as deductions}.

D) Artist

Professional artist: TR 2005/1

(b) Is the receipt business income?

Not all receipts are income because the taxpayer is carrying on a business.

(i) Too soon / late?

Feasibility studies for a business that never eventuated was held to be too soon (Softwood Pulp {expenses relating to the establishing of a paper production facility were not deductible, as they were held to be entirely preliminary and directed at deciding whether or not an undertaking would be established to produce assessable income.}).

Losses incurred during a break in the business are likely to be still claimable (ADC (Advances) Ltd {AD was in the money lending business, but stoped before later resuming. They claimed bad debts as deductions. The ATO asserted that these were not claimable because the business was not continuing. However, the court held that the losses were referable to the business}).

(ii) Sale of assets / One-off & extraordinary transactions

Traditional approach

Traditionally, the mere realisation of an asset is capital in nature, however where the sale occurs in the carrying out of the business and there is a sufficient nexus, the receipt will be income (Californian Copper Sundicate v Harris {The taxpayer was a copper miner who sold the land the mine was on after the copper reserves ran out. The taxpayer asserted that the sale was a mere realisation of the land and was not income. The court agreed.}; Scottish Australian Mining Ltd v FCT {Californian Copper was adopted by the High Court. In this case, the taxpayer carried on a mining business and sold the land when the coal reserves were exhausted in 1924. Upon deciding to sell the land, the company built roads, railways and granted land to the public – for schools, hospitals & parkland. The taxpayer received large profits. The Commissioner argued that this was not a mere realisation, due to the additional work that the company did to bring the land to a saleable condition. The court held that the receipt was capital in nature, and the facts would need to be very strong in order to find that a business that was bought for a purpose other than making a profit by sale, was in the business of selling land.}).

In Californian Copper, the court adopted a 2 step test for determining whether a receipt from a sale of an asset was income:

What is the exact nature and scope of the business?

Is there a nexus between the business and the receipt?

Proceeds from large-scale sub-division and development constitute income (FCT v Whitfords Beach Pty Ltd {involved subdivision, road works, installation of road lights and provision of parklands}; Cf Scottish Australian Mining – although may be able to distinguish on the basis that was not the primary purpose of the land, rather was a way of acquiring the best price).

The court looks at the substance of the transaction and business, so that the sale of shares in the company, rather than the asset itself will not prevent the sale from constituting income if that was its true purpose (FCT v Whitfords Beach Pty Ltd {A group of developers wanted to purchase land, but in an attempt to avoid it being classified as income, purchased shares in the company that owned the shares. The company did not originally purchase the land with the intent of selling it to make a profit. This would have meant that the receipt would have


been capital in nature. However the change of shares meant a change in the business of the company, so that the receipt was held to be income}).

New Approach

However, the Californian Copper principle has potentially been broadened by Myer Emporium Ltd v FCT {There, to avoid a restrictive loan covenant, the company had to artificially borrow money off their balance sheet. To do this, the taxpayer sold subsidiaries and lent the money to a shelf company on commercial terms. The taxpayer sold the interest repayments to Citibank for $45 million. The taxpayer argued that the transaction was not income because it was a one-off transaction. However, the court held that the receipt was income. While they endorsed the logic behind Californian Copper, the court held that an extra-ordinary transaction does not preclude a the receipt from being income.}.

Under this test, profits or gain realised in the ordinary course of business are income, in addition to certain receipts through extraordinary transaction (Myer Emporium v FCT).

However, such a wide discrimen has been criticised given the capital / income distinction in the tax acts (FCT v Spedley Securities Ltd).

Extraordinary transactions

Relevant factors in determining whether the transaction is a business one are:

the Nature of the entity undertaking the transaction

nature and scale of the activities

the amount of money and profit involved

complexity of the transaction

manner it was entered into

complexity of the transaction

manner it was entered into

connections between parties to the transaction

nature of any property acquired or disposed of

timing of the transaction or steps involved in the transaction.

(TR 92/3 at [13]; Myer Emporium; Westfiled Ltd v FCT).

Where a not-insignificant purpose of the transaction is making a profit, it is likely to be income (FCT v Cooling; Cf where there is no intention: SP Investments Pty Ltd v FCT).

The actual method the profit was made must relate to the profit making purpose contemplated when assets were purchased (Westfeild Ltd v FCT {Westfield bought land to develop into a shopping centre, but at a later stage sold the land to AMP ata profit. The court held that this was capital in nature because the purposes of the profit making venture (to develop and lease retail space) were different from the actual method of realisation}; TR 92/3 at [9]).

{as statutory provision, CGT will trump this, so even if it is ordinary income, you will apply CGT to get discount/index provisions}

(iii) Income conversions


Amounts received as compensation for lost income are themselves income (Myer Emporium Ltd v FCT).

Factoring debts owed to the company, where the debts would be income, are income (FCT v Unilever Australia Securities Ltd).

(iv) Payments for restriction of rights (restraint of trade)

Generally, payments to restrict rights are of a capital nature (Beaks v Robson; Higgs v Olivier {paid not to appear in any movie for 18 months. this was held not to be income.}). However, this will not always be the case, and the court will look at, inter alia, how regular such payments are in the industry.

{Note possible CGT implications – CGT Event D1}

Agreements to sell certain products is capital in nature (Dickenson v FCT).

(v) Banking, insurance and investment cases

Generally investments in the sale of income-earning investments are not assessed under s 6-5 ITAA97. However, the court makes exception for banks and insurance and investment companies. Although the assets are not trading stock, they are considered to be revenue assets. As such, the realisation of assets by these companies will be ordinary income (Colonial Mutual Life Assurance Society Ltd v FCT).

However, not all sale of shares will come within this concept (National Bank of Australia v FCT {NAB acquired a Queensland bank through the purchase of shares. NAB later divested the bank, selling the shares at a profit. This receipt was held to be of a capital nature.}).

(vi) Leasing

If a company is in the business of leasing assets, they may also be in the business of selling the assets after the expiry of the lease making receipts income (Memorwx Pty Ltd v FCT), but not where there was no intention of sale (FCT v Hyteco Hiring Pty Ltd).

Lease incentive payments are generally income (FCT v Cooling {received inducement to move solicitor’s premises to a new building. This was held to be income.}).

(vii) Intellectual property

Where the company is in the business of developing intellectual property for profit, the sale of it may be income, provided that sale was contemplated (Ducker v Rees Roturbo Development Syndicate {Set up to develop IP. Main revenue was royalties from licensing, but also contemplated sale. This was held to be income.}; Cf Moriarty v Evans Medical Supplies Ltd {drug supplier sold the secret processes to make drugs to the Burmese government. This was held to be capital in nature.}).


(c) Trading stock

Because <Taxpayer> is carrying on a business, the level of trading stock will affect their assessable income. This ensures that the business’ assessable income and allowable deduction accurately reflects their profits from trading activities.

(i) Is <item> trading stock?

Trading stock is defined as live stock, or “anything produced, manufactured or acquired that is held for purposes of manufacture, sale or echange in the ordinary course of a business” (ITAA97 s 70-10).

Trading stock may include:

land (ie if you are a property developer) (FCT v St Hubert’s Island Pty Ltd)

shares (ie if you are a share trader) (Investment and Merchant Finance Corp Limited v FCT)

CDs for a music store

Clothes for a retailer

Work in progress for a manufacturer

Trading stock does not include:

spare parts

goods for hire {they are not being sold}

Crops which are not yet harvested {they still form part of the land}

work in progress for a professional firm or long term construction project.

Here, the <asset/trading stock> [is OR is not] trading stock.

(ii) Trading stock adjustment

A) Rule

The difference in the value of the trading stock on hand at the beginning and end of the income year will be either assessable income or an allowable deduction (ITAA97 s 70-35).

{The rationale of this is that it will stop people from building up large amounts of trading stock, claiming the purchases as a deduction.}

B) Is the trading stock on hand?

Trading stock is on hand if <Taxpayer> has the legal power to dispose of the goods (Garnsworth v FCT; IT 2670).

A lack of ownership does not preclude the trading stock from being on hand (FCT v Suttons Motors (Chullora) Wholesale Pty Ltd {floor plan finance}).

A lack of physical possession is not decisive (All States Frozen Foods Pty Ltd v FCT).

C) What is the value of trading stock


Under ITAA97 s 70-45, Trading stock can be valued at its:

cost – this includes all amounts incurred in acquiring the item or brining it into existence (Philip Morris Ltd v FCT). This is not available where the transaction is not at arms length and the Taxpayer pays above market value at the time (ITAA97 s 70-20); You can elect between FIFO and weighted cost (IT2350).

market selling value – ie the amount it could be sold for in the Taxpayer’s ordinary course of business (Austalasian Jam Co Pty Ltd v FCT);

replacement value.

The taxpayer can elect which method they use, and switch between income years, provided that the value of an item at the end of one income year is the same as its value at the start of the next income year (ITAA97 s 70-40).

The Taxpayer may also elect to use a lower, reasonable value if the stock has become obsolete, or for some other special reason (ITAA97 s 70-50).

If the asset is disposed outside the ordinary course of business, then the relevant value is its market value (ITAA97 s 70-90).

{Change in ownership – see ITAA97 s 70-100}

D) Outcome

Here, the value of the trading stock at the start of the year is $__________, and its value at the end of the year is $___________.

ValueEnd > ValueStart Assessable income includes the costs of goods that were purchases but not soled

ValueStart > ValueEnd Allowable deduction provides a deduction for the cost of goods purchased in prior years that were sold in this income year.

Therefore, because:

the value at the end is $_________ more than at the start, this amount become assessable income of <Taxpayer>.

the value at the start is $_________ more than at the ends, so this amount becomes an allowable deduction for <Taxpayer>.


3.6. Is it statutory income?Assessable income also includes statutory income derived from [all sources {for Australian residents} OR Australian residents {for foreign residents}] (ITAA97 s 6-10).

{Division 10 has a list of all provisions dealing with assessable income}

Section 15-2 ITAA97 makes the value of benefits in respect of employment assessable income regardless of whether they are convertible into money {3 elements (1) benefit or allowance (2) allowed, given or granted (3) nexus with employment / services rendered} {but if it is ordinary income, it is excluded from this provision: s15-2(3)(d) ITAA97} {not as important now given the FBT regime} {will apply to allowances cf reimbursement}

Return to work payments (s15-3 ITAA97)

Royalties (s15-20 ITAA97)

Indemnity for loss of assessable income (s15-30 ITAA97)

Interest on early payment or overpayments of tax (s 15-35 ITAA97)

Reimbursed car expense (s 15-70 ITAA97)

Capital Gains Tax (s 102-5 ITAA97).

3.7. Is it exempt income?Exempt income is not included in the income tax equation.

An amount may be expressly or implicitly exempt. This may be because:

the entity is an exempt entity (s11-5 ITAA97)

The type of income is exempt (s11-10 ITAA97)

The income is exempt because it is derived from certain entities (s11-15 ITAA97)

3.8.Non-assessable, non-exempt income?Income can be non-assessable, non-exempt income (ITAA97 s 6-1(4)).

Non-assessable, non-exempt income is not used to calculate taxable income, but is counted in reducing prior year tax losses.

Section 11-55 lists the non-assessable, non-exempt provisions; FBT and GST fall within this.

Division 59 details particular amounts.

3.9.Conflict rules / double countingA receipt may be both ordinary and statutory income, however the amount is only included as assessable income once (s 6-25 ITAA97).

Generally, the statutory provisions prevail over rules about ordinary income unless otherwise provided {as occurs in s 15-2} (s 6-25 ITAA97).


4. Derivation of IncomeOrdinary income is only assessable if it is derived in the income year (ITAA97 s 6-5(2)).

There are two methods of accounting for income: the cash or accrual methods. The taxpayer must uses the one that substantially reflects the taxpayer’s true income (Carden’s Case {The executor of the Taxpayer’s estate received money for outstanding debts of the Taxpayer’s business. The Taxpayer was a sole practitioner, had no trading stock, had a mainly cash business, only recorded money when it was received and the receipts related to personal exertion. This was held to be ok to work on a cash basis}).

There is only one correct method for determining each type of the Taxpayer’s income.

Commissioner’s view

In TR 98/1, the Commissioner expresses the view that:

salary and wages should be assessed on a cash basis.

rent and interest should be assessed on a cash basis.

dividends should be assessed on a cash basis (s 44 ITAA36).

Business that focus primarily on the application of person expertise, should use a cash method.

Business should use the accrual method if:

producing activities involve the sale of trading stock

outgoings directly relate to the income derived

relies on circulating capital or consumables to produce income

rely on staff or equipment to produce income.

Case Examples

Carden’s Case: The executor of the Taxpayer’s estate received money for outstanding debts of the Taxpayer’s business. The Taxpayer was a sole practitioner, had no trading stock, had a mainly cash business, only recorded money when it was received and the receipts related to personal exertion. This was held to be ok to work on a cash basis.

FCT v Firstenberg: taxpayer was a sole practicing solicitor, who employed a secretary. The cash basis was appropriate.

Arthur Murray (NSW) Pty Ltd v FCT: The taxpayer taught dance classes, which were paid for in advance. Students were not entitled to refunds, however refunds were given in practice. The court held that the accrual method was appropriate. Although the court did consider the issue of refund (ie if no refunds were given, it may be on a cash basis), but the court also looked at the scale of operations and the fact that the taxpayer put the receipts into a special account and only drew upon them once the lessons had been taken.

Brent v FCT: The taxpayer sold his/her life story. Payment was made in 3 instalments: singing, upon the manuscript and at the end of the process. For the relevant year, the taxpayer had done all the work, but had only received some of the payments. The court held that an cash basis was reasonable.

Henderson v FCT: The taxpayer was in professional practice as a partnership of accountants (19 partners and 295 staff), and changed from cash to accrual. The court said that all the factors pointed to the taxpayer operating on an accrual basis.


5. Source of income

5.1. IntroductionThe source of income is a question of fact, determined by practical concepts of the meaning of source (Nathan v FC of T (1918) 25 CLR 183 {Getting dividends from UK – was it sourced in UK or Aus – this issue is not relevant now, but it sets the source rule: Q of F. Per Isaacs J: The Legislature in using the word ‘source’ meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the

ascertainment of the actual source of a given income is a practical, hard matter of fact.}).

5.2.Source RulesGenerally, the court will look at where the economic activity arose (Thorpe Nominees Pty Lrtd v FCT).

Where the income arises primarily out of contractual dealings, the place of contract will be significant; whereas if performance is the main factor, the place of performance will be the source (CT (NSW) v Cam and Sons Ltd). The court may apportion the source of income.

(a) Services

The source of salary and wages will usually be where the service was performed (FC of T v French (1957) 98 CLR 398 {work was sent to NZ, held that the income was sourced in NZ}; FC of T v Efstathakis 79 ATC 4256 {Greek Government employed person to work in Australia. Australia was the source of the income.}).

However, the place of contract may be the source of the income (FCT v Mitchum (1965) 113 CLR 401 {Mitchum contracted overseas to make a film for 7 week in Australia. Held to be sourced in

the place the contract was made.}).

(b) Business income / trading stock

The source of business income will generally be determined where the trading activities took place (C of T (WA) v D & W Murray (1929) 42 CLR 332 {where goods sold}; FC of T v United Aircraft Corporation (1943) 68 CLR 525 {where business transacted}).

The income may be apportioned between multiple sources (FCT v Lewis Berger & Sons (Australia) Ltd).

(c) Rental income

Where real property is leased, the rental income is sourced at the location of the real property (Rhodesia Metals Ltd (in liq) v C of T [1940] AC 774).

Where chattels are leased, rental income will be sourced at the place where the contract was entered into (Rhodesia Metals Ltd (in liq) v C of T [1940] AC 774).

(d) Sale of property (non-trading stock)

Where property is sold, the income will generally be sourced from the place the contract was entered into, except for certain types of property {eg shares}.

However, in the case of immoveable property, it may be the location of the property (Rhodesia Metals Ltd )in liq) v FCT).


(e) Interest

Interest income is sourced from the place the contract is made, or the money advanced (FC of T v Spotless Services Ltd 95 ATC 4775).

(f) Financial transactions / insurance

The source of financial transactions are the place where the services are performed (Tariff Reinsurances Ltd v CT (Vic) (1938) 59 CLR 194 {The source was the UK where the company carried on the business of reinsuring risks accepted by others}; Thorpe Nominees v FCT (1988) ATC 4886 {Must look at the substance of the agreement, not it’s form – involved an artificial shift of income offshore}).

(g) Dividends

The source of dividends are the place from which the profits of the company are sourced (ITAA 1936 s 44 (1)).

The source of the company’s profits are a question of fact (Esquire Nominees Ltd v FCT).

Withholding tax may apply where a resident company pays dividends to a non-resident (TAA schl 1 s 12-210). Withholding will only apply when the dividend is unfranked.

(h) Royalties

The source of royalties are deemed to be the location of the IP, unless it is a royalty leaving Australia, in which case the income is sourced in Australia (ITAA 1936 s 6C).


6. Allowable deductionsAn allowable deduction is a general deduction or specific deduction.

6.1.General deductionsA general deduction is a loss or outgoing to the extent that:

it is incurred in gaining or producing your assessable income; or

it is necessarily incurred in carrying out a business for the purpose of gaining or producing your assessable income

(ITAA 1997 s 8-1(1)).

ITAA 1997 s 8-1(2) sets out losses that cannot be deducted {negative limbs}.

(a) Does the loss or deduction fall under s 8-1(1)?

(i) Loss or outgoing

Here, there is clearly a(n):

loss, as there was [an obligation to pay the amount OR there was no choice whether to pay the amount]; or

outgoing, as <taxpayer> voluntarily paid the amount.

Case examples:

Theft was held to be a loss (Charles Moore & Co (WA) Pty Ltd v FCT (1935) {the taxpayer was doing his banking, and was robbed on the way to the bank. He claimed the theft as a deduction, which was upheld by the court.})

Bad debts were held to be a loss (AGC (Advance) Ltd v FCT)

Thus, this element [is OR is not] satisfied.

(ii) To the extent that

The term ‘to the extent that’ indicates the concept of apportionment (Ronpibon Tin NL v FCT).

Apportionment is appropriate where the costs can be clearly distinguished, or where there is a lump sum that serves multiple purposes (Ronpibon Tin NL v FCT).

Apportionment rules are likely to apply when the transaction is not at arms length (Ure v FCT {taxpayer wanted to buy a house, but to make it an allowable deduction they lent the money to a related entity for 1% interest, allowing the taxpayer to claim the 12.5% interest as a deduction. The court held that only the 1% could be claimed}).

Here, <taxpayer> may need to apportion the [loss OR outgoing] between the <deductable activity> and <non-deductible>. We are told that <%> was used for <deductable activity> meaning only that amount may be claimed.

Ronpibon Tin NL v FCTFacts: The taxpayer operated a mining company that ceased mining during WWII. During the time it was shut down, the company still had administrative costs from their mining operations and income from other investments. The taxpayer claimed the costs as deductions.


Law: - The court held that some of the administrative costs could be referable to the income generating

activity- there are two situations where expenditure could require apportionment: (1) where they are clearly

distinguishable, so that you can see which expenses relate to which; and (2) where there is a lump sum of costs that serve both purposes.

- The court held that the directors fees could be apportioned between the mining and non-mining activities, allowing a proportion of them to be an allowable deduction.

- The court did not allow the expenses from the mining operations to be included as allowable deductions.

(iii) Non-business: Incurred gaining assessable income

A) Was it incurred?

There must be a definite liability to pay, not merely an impeding, threatened or expected loss or outgoing.

A loss may be incurred even if it is unpaid, if the taxpayer has completely subjected themselves to the liability (Commonwealth Aluminium Corporation Ltd).

Provisions for losses or outgoings (such as provisions for bad and doubtful debts, and employment leave) are not incured.

In some cases, subjecting yourself to the liability will not mean the outgoing is deductible in that year, and it may be apportioned (Coles Myer Finance Ltd v FCT {at the beginning of the contract paid an amount to cover expenses over the 2 year term of the contract. The court held that just because the taxpayer subjected themselves to the expense in one year, that does not mean that the full amount is deductable, apportioning it across 2 years}; TR 94/26). However, in FCT v Woolcombers (WA) Pty Ltd, losses under forward contracts were held to be deductible in the year they were entered into.

Here, <outgoings> has been incurred.

B) Was it incurred gaining or producing your assessable income?

The loss or outgoing must be incurred in gaining or producing the taxpayer’s assessable income (ITAA97 s 8-1(1)(a)).

The court will be lenient with regards to the deductibility of outgoings incurred for subsidiary companies (FCT v Total Holdings (Australia) Pty Ltd).

This nexus can be demonstrated by showing that the outgoing:

was incidental and relevant to the production of income; or

had the essential characteristic of being related to gaining assessable income.

{only need to show one}

Is the outgoing incidental and relevant?

To establish the relevant nexus, the expenditure must be incidental and relevant to the production of assessable income (Ronpibon Tin NL v FCT).

This involves a comparison of the scope of the income producing activities and the relevance of the expenditure to the scope, rather


than the purpose of the expenditure in itself (Herald Weekly Times {Legal costs to defend defamation actions were held to be deductible for a newspaper company because, inter alia, the liability was encountered because of the act of publishing the newspaper, which was done to produce income. The expenditure was a natural consequence of the publication of the allegedly defamatory material to produce profits}; W Nevil & Co Ltd v FCT {Company paid a director a fee to resign. It was held that this was incidental and relevant to gaining assessable income because it was designed to improve the operations of the company.}).

There must be something more than a causal connection (Payne {Travel between work as a pilot and deer farm business. Court held that this was incidental and relevant.}).

Here, the expenditure on <outgoing> [was OR was not] productive of assessable income, and the nexus [will OR will not] be established.

Essential characteristic

The court will look to the essential characteristic and nature of the outgoing to determine whether it is productive of assessable income (Charles More & Co (WA) Pty Ltd v FCT {Daily banking of retail store was stolen. Held to be an allowable deduction.})

The mere fact that the expenditure is a pre-requisite to deriving income is not sufficient (Lunney and Hayley v FCT {Fares between home and work not allowable}; Lodge v FCT {childcare}).

A requirement by an employer to incur an expense does not automatically make it a deduction (FCT v Cooper {professional footballer was denied a deduction for additional food and drinks his coach instructed him to consumer to bulk up}).

Objective or subjective

The court will generally examine the outgoing objectively (Cecil Bros Pty Ltd v FCT {High Court allowed deductions for a shoe retailer, even though it was overpriced}). The courts will generally leave it to the taxpayer to determine how they run their business, and will not inquire into the price paid, unless it is grossly excessive (FCT v Phillips {The taxpayer was a group of accountants who set up a services company to deal with the secretarial and other expenses. The service company charged the partnership commercial rates for the services. The high court held that because this was commercially realistic, and not grossly excessive, the expense was deductible.}).

However, in certain circumstances the court will go behind the objective circumstances to determine the taxpayer’s true purpose for incurring the expenditure (Magna Alloys & Research Pty Ltd v FCT; Ure v FCT {borrowed money at 12.5% and lent the money at 1% to his wife and the family company, which was used to discharge mortgages on property. The taxpayer argued that he was entitled to a deduction for the entire 12.5% in interest as it was used to generate the 1% interest. The High Court looked behind the transaction and only allowed 1% of the interest to be deducted.}). This will arise particularly where the deduction is greater than the income (Fletcher).

Alternative test?


In FCT v Day, it was suggested that the 2 tests were of little help, and that the test should be whether the outgoing was productive of actual or expected income.

(iv) Business: Necessarily incurred carrying on a business for the purpose of gaining assessable income

C) Necessarily incurred

Necessarily incurred means that it is “clearly appropriate and adapted” (Ronpibon Tin NL; TR 95/33).

The court will examine the business ends to which it is directed and often use a reasonable business person as a benchmark (FCT v Snowden & Wilson Pty Ltd {advertising to show it’s side of the story, was held to be deductible}).

D) Carrying on a business for the purpose of gaining assessable income

There must be a nexus between the outgoing and the business, which may require a temporal connection (Steele v FCT).

Before business

Outgoings that are preliminary to the commencement of business are not deductable (Softwood Pulp and Paper Ltd v FCT {feasibility study to determine whether to establish a paper mill}; Griffin Coal Mining Company Ltd v FCT {feasibility study into an aluminium smelter. It was held that this did not relate to the taxpayer’s business, but rather a potential source of new income.}).

After the cessation of a business

It has been traditionally believed that deductions were not available after the cessation of business (Amalgamated Zinc (De Bavay’s) Ltd v FCT {had closed down a mine, but was still liable for workers compensation contributions. This was held not to be deductible.}).

However, the better view is that a cessation in business will not prevent deductibility (AGC (Advances) v FCT {there was a pause in the operation of the taxpayer’s business, and during the break, the company claimed deductions. The court allowed these deductions}; Placer Pacific Management Pty Ltd v FCT {Allowed deductions for expenditure incurred settling a dispute with a customer after it had left that business.}).

A practical approach is taken to assess deductibility after the cessation of business (FCT v Brown).

Costs involved in selling a business are not deductible (Peyton v FCT).


(b) Does anything in s 8-1(2) exclude the deduction?

(i) Capital or capital nature

Losses and outgoings are not deductible to the extent that they are capital in nature (ITAA97 s 8-1(2)(a)).

There are a number of different tests to determine whether an outgoing is capital in nature. The leading test is the business entity test.

A) Business entity test

The business entity test established in Sun Newspapers v FCT, considers:

Whether the expenditure relates to the business tructure or the process of operating the business

the nature of the asset or advantage sought

the degree of recurrence of the expenditure.

Here, <outgoing> is [likely OR unlikely] to be capital in nature because___.

B) Once and for all test

An expenditure that is spent once and for all is more likely to be capital in nature, whereas a reoccurring expenditure is more likely not to be capital (Ballambrosa Rubber Co Ltd v Farmer).

C) Enduring benefit test

The outgoing is more likely to be capital in nature if it is made with the view of bringing into existence an asset or advantage for the enduring benefit of a trade (British Insulated & Helsby Cables v Atherton).

D) Fixed or circulating capital test

An expense related to fixed capital will be capital, wherease outgoings related to circulating capital will not be capital in nature(BP Australia v FCT).

Conclusion

Here, <outgoing> [is OR is not] capital in nature, meaning it [may be OR is not] an allowable deduction.

(ii) Private or domestic nature

Losses and outgoings are not deductible to the extent that they are private or domestic in nature (ITAA97 s 8-1(2)(b)).

Private expenses relate to a person as an individual, while domestic expenses relate to a person’s house or family organisation.

E) Home Study / Office

There are two different types of expenses that may be claimed: occupancy expenses and home study expenses (TR 93/30).

Occupancy expenses (which include rates, repairs & interest on mortgages) are only deductible if the premises is a place of business (Swinford; Thomas


v FCT). It is not sufficient that the place is used as a matter of convenience (Handley; Forsyth).

Home study expenses (ie lighting, depreciation on computer, etc) will be deductible if there is a sufficient nexus with income. Unlike occupancy expenses, these can be deducted even if the study is only used as a matter of convenience (Handley).

Apportionment may be required, which is usually done on a time and floor area basis.

F) Clothing

Clothing may fall into one of 5 categories:

Conventional clothing

compulsory uniforms

non-compulsory uniforms

occupational specific clothing

protective clothing.

Conventional clothing is not generally deductible. However, in certain circumstances it will be deductible (FCT v Edwards {The taxpayer was the private secretary to the governor, and had to have significantly expensive formal gowns to attend balls. The court allowed these as deductions for a number of reasons, including that she had to change multiple times throughout the day.}).

Items of clothing to protect against harsh working conditions may be deductible (Mansfield v FCT {an airline attendent claimed stockings and skin cream, claiming that they protected her from various things associated with flying. The court upheld this.}).

Protective clothing is not private or domestic in nature, even if it could be classified as conventional clothing, provided in the circumstances it is used as protective clothing (TR 2003/16 at [10]). For example, sun protection items are not private in nature and are deductible (Morris v FCT).

A compulsory uniform is not private or domestic in nature if it creates a distinctive image – a requirement to wear a particular colour, brand or style is not sufficient {but a very strict definition of compulsory – must be in guidelines and be strictly enforced} (TR 96/16 at [6] & [7]).

G) Travel

The cost of travelling between home and work is private in nature (Lunney). Exceptions include:

commencing work at home prior to travelling to work

an itinerant worker whose home is their base of operations

where there is a need to transport heavy or bulky material (FCT v Vogt {musician carrying instrument}).

The cost of travel between unrelated workplaces are deductible under ITAA97 s 25-100 (see also Payne). Capital expenditure cannot be deducted (s 25-100(5)).


You cannot deduct the cost of an accompanying relative, if their presence is not related to producing assessable income (ITAA97 s 26-30).

H) Child Care

Child care is not deductible because it is private or domestic in nature (Lodge v FCT).

I) Physical Fitness / Food

Food will generally not be deductible, however, it is not impossible that food is not private or domestic in nature (FCT v Cooper).

J) Self education

Self-education expenses are generally deductible because there is usually a nexus to assessable income.

A deduction will not be allowable for an initial qualification because this is capital in nature (FCT v Finn).

Self-education expenses will be deductible where they improve or maintain the taxpayer’s skills, or objectively is likely to lead to an increase in income from the taxpayer’s current income producing activities (TR 98/9; FCT v Hatchett {lead to a promotion}; FCT v Highfield {improve earnings}).

In Anstis v FCT, the court held that various university expenses were deductible because they related to the youth-allowance, which was assessable income and conditional upon passing, and therefore met the deductibility requirements.

Deductions will be available even if the training involves an overseas trip (ie to go to a conference) (FCT v Finn).

A deduction is not available for HECS or HELP (ITAA97 s 26-20).

Section 82A ITAA36 renders the first $250 of self-education expenses from prescribed education courses non-deductible.

(iii) Incurred in relation to exempt income or non-assessable, non-exempt income

Losses and outgoings are not deductible to the extent that they are incurred in relation to exempt income or non-assessable, non-exempt income (ITAA97 s 8-1(2)(c)).

(iv) Provision of act

An outgoing is not deductible if a specific provision denies it (ITAA97 s 8-1(2)(d)).

Penalties (s 26-5)

Higher education contributions (s26-20)

Family maintenance payments (s26-40)

Entertainment expenses (s32-5)

Recreational club expenses (s26-45)

Non-compulsory uniforms (Div 34)


Car packaging expenses (s 51AGA)

First $250 of certain self education expenses (s 82A).


6.2.Specific Deductions

(a) Repairs

Repairs to a premises or depreciating asset are deductible to the extent that the assets are used to generate assessable income (ITAA97 s 25-10(1)&(2)).

(i) Was expenditure incurred?

An expenditure must occur – a saving is not sufficient.

Here, the <taxpayer>’s expenditure of $__________ on <repair> has clearly been incurred.

(ii) Was it a repair?

The item must have needed repair or restoration (Case J47).

The repair must be for the purposes of restoring the item (W Thomas & Co v FCT).

Alterations and additions are not repairs.

Distinguishing from capital expenditure

A repair is not capital expenditure (ITAA97 s 25-10(3)).

Part v entirety

A repair is not a reconstruction of the entirety (Lurcott v Wakely and Wheeler).

Whether it constitutes a part or the entirety is a question of fact (TR 97/23). To determine this, the court looks at whether the item is a subsidiary of an other item, or an entirety in itself. The courts have applied a test as to whether it is a ‘physically, commercially or functionally’ inseparable part of a large unit, or a unit in itself (Lindsay v FCT {The taxpayer replaced a slipway that was in need of repair with a concrete one, also making it longer. The Commissioner argued that the slipway was the entirety, whereas the taxpayer argued their shipping business was the entirety. The court held that it is to be determined according to physical things not profit making entity.}; W Thomas & Co Pty Ltd {held that when repairing a building, the floors, windows, etc were the parts.}).

In Alcoa of Australia Ltd, a bake furnous was held to be the entirety, despite it’s two main components (brickwork and a waste gas duct) being listed separately in the company’s books.

In Rhodesia, the whole railway track system was held to be the entirety.

Repair v improvement

An improvement is not a repair (FCT v Western Suburbs Cinema Ltd {The cinema needed to replace its roof that was made out of a material similar to tin. Because the actual type of metal that the old roof was not available, it was replaced with a fibro roof. This was held to lead to a functional improvement in the cinema.}; BP Oil Refinery (Bulwer Island) Limited v FCT {BP claimed expenses for encasing wooden pylons supporting a wharf


in concrete to protect against damage from marine organisms. This was held to be capital in nature.}).

Repair involves the restoration of an item to its former condition without changing its character (W Thomas & Co).

To be a repair, the expenditure cannot lead to a functional improvement in the quality of the asset (FCT v Western Suburbs Cinemas).

However, more modern materials may be used without it being considered an improvement (Wates v Rowland). It is a question of the function of the repair, not its material per se (W Thomas & Co).

Questions to ask:

Does the renewed part have advantages over the original?

Is the renewed material different to original? (not decisive)

Are future repairs likely to be reduced (was influential in FCT v Western Suburbs Cinemas).

Maintenance v initial costs

Costs that are incurred to bring an asset into a workable are not repairs, but rather form the cost of the acquisition (W Thomas & Co v FCT {bouth a building but it was in a run down state. Court held that some of the expenditure was repairs (by reference to whether it was periodic, normal wear and tear) but that other parts were the cost of acquisition.}; TR 97/23).

(iii) Was the repair to an item used for income producing activities (apportionment)?

There is no need to own the asset; it merely must be held or used.

Apportionment must be made to the extent the item is not used to produce assessable income (ITAA97 s 25-10(2)).

(iv) Conclusion

Therefore, <expenditure> [is OR is not] an allowable deduction.

(b) Capital regime (depreciation)

<taxpayer> can deduct the decline in value of a depreciating asset held during the income year (ITAA97 s 40-25 (1)). The deduction must be apportioned to the extent that the asset is not used for a taxable purpose (ITAA97 s 40-25(2)).

(i) Is <asset> a depreciating asset?

The asset is a depreciating asset because it has a limited effective life of ___ years, it is expected to decline in value, and it is not:

land

trading stock

intangible assets, unless they are:

mining, quarrying or prospecting rights


mining, quarrying or prospecting information

items of intellectual property

in house software

IRUs

spectrum licences

datacasting transmitter licences

telecommunications site access rights

Other exclusions:

does not apply to an eligible work related item for the purposes of section 58X of the FBTAA (ITAA97 s 40-45)

where Division 43 (Capital works regime) (ITAA97 s 40-45)

Where the special rules regards Australian filsm apply (ITAA97 s 40-45)

Where it is deducted under another sub-division (ITAA97 s 40-50)

for a car, where you use the cents per kilometre or 12% of original value method (ITAA97 s 40-55).

(ii) Does <taxpayer> hold the asset?

The taxpayer must hold the asset (ITAA97 s 40-25). Section 40-40 sets out a table of who holds the asset in certain circumstances.

The (legal) owner will hold the asset unless one of the items apply(section 40-40 item 10). Examples include:

lease on luxury car – item 1

parnterhip – item 7.

(iii) Is there a taxable purpose?

Here, the taxpayer uses the asset ____% for the taxable purpose of:

producing assessable income

exploration or prospecting

mining site rehabilitation

environmental protection activities

(ITAA97 s 40-25(7)).

Thus, only ____% of the depreciation is deductible.

(iv) What is the decline in value?

Starting time

The <asset> began diminishing in value from the start time, which was _____________, because that was when the taxpayer first used, or had it installed ready for use (ITAA97 s 40-60).

The number of days held for this first year is _______.


Starting value

The starting value of the asset is:

the amount paid for it (s 40-180), which is $_______; plus

the cost to bring the asset into its present condition and location (s 40-190), which is $_________.

The starting value is reduced by the amount of Input Tax Credits {GST} abailable to the entity (s 27-80).

Cars that are over a certain limit (2007-08 = $57,123; 2008-09 = $57,180) are limited to that amount (s 40-230).

Thus, the starting value of the asset is $____________.

Effective life

Pursuant to s 40-95, <taxpayer> may choose to:

adopt the Commissioner’s effective life published in tax rulings (s 40-100); or

calculate their own effective life (s 40-105). If this method is adopted, it must be calculated in accordance with reasonable wear and tear, or how long the entity expects until it will scrap the asset (s40-105(2)).

Here, the effective life is ________.

Calculation

The taxpayer may choose between the diminishing value or prime cost method (ITAA97 s 40-65(1)).

Diminishing Value: post 9-May 2006 assets

€

Decline in value = Base Value × Days held

365×

200%

Asset's Effective Life

Diminishing Value: pre 10-May 2006 assets

€


365×

150%


Prime cost

€


365×

100%


The base value is:

the cost value in the first year;

or the opening adjustable value of the asset, which is the cost of the asset plus any capital improvements to the asset, less the decline in value

(s 40-85).

Therefore, the decline in value will be $_________ under diminishing value, compared to $_________ under the prime cost method.

(v) Balancing adjustments


When a taxpayer ceases to hold an asset it must make a balancing adjustment (s 40-285).

Where the asset was worth less than anticipated – ie the termination value is less than the adjustable value – this difference is deductible (s 40-285).

Where the asset was worth more than anticipated – ie the termination value is more than the adjustable value – this difference becomes income (s 40-285).

(vi) Other capital allowance regime issues

A) Immediate deductions

You can immediately deduct depreciating assets that are predominantly used to produce assessable income that is not income from carrying on a business, if the cost does not exceed $300 (ITAA97 s 40-80).

B) Low cost plant

Assets that cost less than $1,000 or have an opening adjusting value of less that $1,000 may be placed in a low-value pool (s 40-425).

The asset must be a depreciating asset used for a taxable purpose (ITAA97 s 40-425(2)).

Once the asset is put in the pool, it must remain in there (s 40-439).

If you choose to have a low-value pool, you must put all low-value assets in the poo (s 40-430). This does not apply to plant acquired prior to 1 July 2000, where it can be allocated on an item by item basis.

C) Capital Works – Div 43

Deductions for ‘Capital works’ are different to ‘capital allowances’.

Governed by Division 43 ITAA97:

This type of expenditure would not be deductible under s 8-1 as it is of a capital nature.

It would not be deductible under the capital allowance (depreciation) provisions as capital works are not depreciating assets.

Capital Works is a deduction for the decline in value of income producing buildings and other works.

Capital Works are a building, an extension, an alteration or improvement to a building, where the construction started:

in Australia after 21 August 1979 or

outside of Australia after 21 August 1990; or

structural improvements or extensions, alterations or improvements to structural improvements anywhere, after 26 February 1992

The rate is either 2.5% or 4% → decline in value much slower

D) Investments

Div 41 ITAA 97


Introduced 2009 as a temporary tax incentive.

on top of depreciation where money spent on developing assets, give tax incentive to do this.

Additional deduction for new investment in tangible depreciating assets made between Dec 2008 and Jan 2010.

Assets that have not been used or installed ready for use by anyone, anywhere.

Investment threshold > $1,000 small business or $10,000 others.

Avail where first time use up to yr ending 2012.

(c) Travel expenses generally

Travel expenses are covered by section 8-1, however there are some statutory provisions:

The cost of travel between unrelated workplaces are deductible under ITAA97 s 25-100 (see also Payne). Capital expenditure cannot be deducted (s 25-100(5)).

You cannot deduct the cost of an accompanying relative, if their presence is not related to producing assessable income (ITAA97 s 26-30).

(d) Car expenses

Div 28 provides for the deduction of car expenses by individuals (or partnership consisting of an individual) (s 28-10).

For each income year, the taxpayer may chose one of the 4 methods to calculate car expenses (ITAA97 s 28-15 & 28-20).

(i) Cents per kilometre

{Max 5,000 business km; no substantiation}

Under the cents per kilometre method, you multiply the number of business kilometres by the number of cents based on the car’s engine capacity (s 28-25(1)).

The business kilometres are capped at 5,000 km (s 28-25(2)).

Business kilometres are those the car travelled in the course of producing assessable income or for travel between workplaces (s 28-25(3)).

Thus, under this method, the deduction would be _________km x _____¢ (usually 74¢) = $___________.

(ii) 12% of original value

{Min 5,000 business km; no substantiation}

If you have travelled more than 5,000 km (28-50).

This method allows you to deduct 12% of the acquisition cost or if the car is being leased, the market value of the car when the lease began (s 28-45).

This value of the car is capped at the car limit (57,180 in 08/09) (ss 28-45(2) & 40-230).



No substantiation is required (s 28-60).

Thus, under this approach, the deduction would be: $____ X 12% = $____.

(iii) One third of actual expenses

{Min 5,000 business km; substantiation}

A person may use the one third of actual expenses approach if they have used the car for more than 5,000 business kilometres (s 28-75).


This method allows you to deduct a third of deductible expenses used in relation to the car (s 28-70).

Thus, these expenses such as registration, petrol, depreciation & interest will be deductible, but outgoings such as tolls & fines will not be included. Expenses that are capital in nature are not included (s 28-13).

Thus, the deduction under this approach would be: $______ ÷ 3 = $______.

(iv) Log book method

{car held, log book kept & substantiation}

You must hold the car to use the log book method (s 28-95).

Under this method you can deduct car expenses to the extent of your business use percentage (ie the percentage you use the car for business purposes) (s 28-90).

Thus, these expenses such as registration, petrol, depreciation & interest will be deductible, but outgoings such as tolls & fines will not be included. Expenses that are capital in nature are not included (s 28-13).

You must substantiate expenses and keep a log book for all journeys in the car for a continuous period of 12 weeks in the income year (ss 28-100, s28-110 & 28-120).

You can use the same log book statistics for the next 4 income years (s 28-115).

Here, the deductible amount under this method is $____ X ___% = $____.

(e) Miscellaneous other deductions

(i) Council rates

Council rates may be deductible under s 25-75. The same principles apply as under s 8-1.

(ii) Gifts / donations

Gifts are voluntary transfers of property with no strings attached, or benefit conferred (FCT v McPhail {‘gift’ to school to have school fees reduced, but a benefit was received, so it was not deductible.}).

A gift is deductible where it is provided to Deductible Gift Recipients (s 30-15). DGRs are listed in Div 30 {include public hospitals, public universities}.


The gift must be over $2, and may be in money or property, provided that the property was purchased within the previous 12 months.

The gift cannot be a testamentary gift.

(iii) Losses from prior years

<Taxpayer> may deduct previous year losses (ITAA97 s 36-10).

When calculating your loss, you must deduct exempt income and any other losses (s36-10).

Losses incurred after 1 July 1989 can be carried forward indefinitely, however those before that date were limited to 7 years.

{special rules for corporations and trusts}

(iv) Tax related expenses

Tax expenses are deductible {such as managing your tax affairs or general interest charge or the shortfall interest charge} (ITAA97 s 25-5).

(v) Borrowing expenses

A deduction is allowed for expenditure incurred to borrow money that is used for the purpose of producing assessable income (s 25-25).

{includes loan application fees, etc}

The outgoing is spread out over the shorter of 5 years or the period of the loan (s 25-25).

(vi) Bad debts

Bad debts only apply to those working on an accrual basis.

<Taxpayer> may deduct the bad debts of $______, because:

they were entitled to be paid the amount by <creditor>

the debt is reasonably an commercially bad, as shown by the fact that it is ____ days overdue and <any other factors>

the debt has been written off

the debt is included in the income of a prior year.

Thus, the bad debt constitutes a deduction of $________.

(vii) Loss by theft, etc

A deduction is allowable where:

the taxpayer discovered the loss in the income year;

there was loss caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or agent; and

the money was assessable income in an earlier income year

(s 25-45).


(f) Substantiation rules – supporting documentation

Div 900 ITAA 97

Requires that taxpayer prove the expense has been incurred.

Generally must show name of supplier, amount, nature of expense, date of expense etc.

No need to provide substantiation of total expenses < $300.

Expenses less than $10 where no receipt can be obtained can be diarised.

If you cannot substantiate an expense, the deduction is denied.


Capital gains tax

1. Kneecaps


2. Statutory incomeIncome tax must be paid for each financial year (ITAA 1997 s 4-10(1)).

Income tax is calculated as: Income Tax = (Taxable Income x Rate) – Tax Offsets (ITAA 1997 s 4-10(3)).

A persons taxable income is: Taxable Income = Assessable Income –Deductions (ITAA 1997 s 4-15(1)).

A person’s income is comprised of ordinary and statutory income (ITAA97 s 6-1).

Capital gains are statutory income (s 102-5 ITAA97).

Net capital losses cannot be deducted from assessable income (s 102-10(2)), only against future capital gains (s 102-15).

3. Has there been a CGT event?

3.1.What event?A capital gain (loss) only arises if there is a CGT event (s 102-20).

Section 104-5 sets out the CGT events.

If more than one exception arises, you generally use the most specific event (s 102-25).

Here, there is a CGT event:

A1 because there was a disposal of a CGT asset (s 104-10)

B1 because the use and enjoyment of the CGT asset passed before title (s 104-15)

C1 because a CGT asset was lost or destroyed (s 104-20)

D1 because there was a creation of contractual or other rights (s 104-35)

E1 because a trust was created over a CGT asset (s 104-55)

E2 because a CGT asset was transferred into a trust (s104-60)

F1 because a lease was granted (s 104-110)

F2 because a long-term lease was granted (s104-115)

I2 because the taxpayer stopped being an Australian resident (s 104-170)


4. Is <asset> a CGT asset?

4.1.Definition of CGT AssetCGT assets are defined broadly as any kind of property or a legal or equitable right that is not property (s 108-5(1); FCT v Miranda {includes restrictive covenant or an exclusive trade tie}).

CGT assets may be part of an interest (s 108-5(2)).

Joint tenants are treated as if they had equal interests as tenants in common (s 108-7; Johnson v FCT).

{check if a collectable or CGT asset!}

Excluded assets:

Pre 20 September 1985 Assets

Passenger motor vehicles or motorbikes (s 118-5(a)), which are defined as those that can hold 9 or less passengers, or loads of less than 1 tonne (s 995).

Depreciating assets (s 118-24)

Trading stock (s118-25)

Compensation for personal injury or workers compensation (s 118-37)

Gambling, game or competition with prizes (s 118-37(c))

Decoration awarded for velour or brave conduct (unless you paid for it) (s 118-5(b))

CGT asset used to produce exempt income (s 118-12(1)).

4.2.Collectable assets

(a) Is it a collectable?

A collectable is:

artwork, jewellery, an antique, or a coin or meddalion

a rare portfolio, maurscript or book

a postage stamp or first day cover

that is used or kept mainly for the taxpayer’s personal use or enjoyment, and includes any interest, debt arising from, or option to acquire any of those things (s 108-10(2)&(3)).

An antique is an object of artistic and historical significance that is over 100 years old (TD 1999/40).

(b) Calculating capital gain/loss

Capital gains on assets with a cost base (or first element of cost id depreciating) of $500 or less are disregarded (s 118-10(1)). However, s 108-15 applies to prevent individual components of sets being sold for under this amount to gain the advantage of this threshold.

The third element of the cost base is not available for collectable assets (s 108-17).


(c) Effect on capital gain/loss

Losses from collectable assets can only be offset against capital gains from collectable assets (s 108-10(1)). {can choose to apply collectable asset losses against gains immediately – ie before any other capital losses}

Losses may be applied against future net capital gains from collectables (s 108-10(4)).

4.3.Personal use assets

(a) Is it a personal use asset?

A personal use asset is:

a CGT asset that is used or kept mainly for the taxpayer’s (or an associate’s) personal use or enjoyment; or

an option to acquire such an asset; or

a debt arising from a CGT event in which the CGT asset the subject of the event was one covered by the first definition; or

a debt arising other than in the course of gaining or producing your assessable income, or from cattying on a business

(s 108-20(2)).

Personal use assets do not include land or buildings (s 108-20(3)).

(b) Effect of being a personal use asset

Capital losses are disregarded (s 108-20(1)).

Capital gains on assets with a cost base (or first element of cost id depreciating) of $10,000 or less are disregarded (s 118-10(3)). However, s 108-25 applies to prevent individual components of sets being sold for under this amount to gain the advantage of this threshold.

The third element of the cost base is not available for personal use assets (s 108-30).

5. Timing & calculation

5.1.Acquisition date generallyGenerally, the acquisition date is the date when you become the owner of the asset (s 109-5(1)).

There are specific acquisition rules arising from CGT events (s 109-5(2)): A1 (date of contract, or previous owner’s loss of ownership), D1 (Date the contract entered into or right created), F1 (contract or time of grant, renewal or extension).

You may acquire a CGT asset without a CGT event (s 109-10).

You do not acquire a CGT asset if it was disposed of to provide or redeem a security, because it vested in a trustee under the Bankruptcy Act, or because it vested in a liquidator (s 109-15).

{Check acquisition date carefully – if prior to 20 September 1985, then not within the CGT framework.}


{NB: ITAA97 s 15-15 {profit making schemes} applies to assets acquired before 20 September 1985}


5.2.A1Disposal occurs where the ownership of an asset changes (but not where the beneficial ownership remains identical) (s 104-10(2)).

The event occurs on the date of contract, or if there is no contract, the date ownership transfers (s104-10(3)).

A capital gain (loss) occurs when the capital proceeds are more (less) than the cost base of the asset (s 104-10(4)).

Specific exemptions:

The capital gain (loss) is disregarded if it was acquired before 20 September 1985 (ITAA97 s 104-10(5)).

The capital gain (loss) is disregarded if the lease was granted, extended or renewed before 20 September 1985 (s 104-10(5)).

An A1 event does not occur where the disposal was to provide or redeem a security (s 104-10(7)).

5.3.C1A C1 event occurs if a CGT asset the taxpayer owns is lost or destroyed (s 104-20(1)).

The time of the event is:

if you receive compensation, when you first receive compensation; or

when the loss is discovered or the destruction occurred

(s 104-20).

A capital gain (loss) occurs when the capital proceeds are more (less) than the cost base of the asset (s 104-20(3)).

The capital gain (loss) is disregarded if it was acquired before 20 September 1985 (ITAA97 s 104-10(5)).

5.4.D1A D1 event occurs when the taxpayer enters into the contract or creates another right (s104-35).

This is only applied if no other CGT events occur (s 102-25).

A capital gain (loss) occurs where the capital proceeds are more (less) than the incidental costs incurred in relation to that event (s 104-35(3)).

The costs can include giving property (s 104-35(4)).

Incidental costs include:

remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor (s 110-35(2))

costs of transfer (s 110-35(3)

stamp duty or similar (s 110-35(4))

cost of advertising or marketing (s 110-35(5))


costs of making valuation or apportionment under Part 3-1 or 3-3 (s 110-35(6))

search fees (s 110-35(7))

conveyancing kit (s 110-35(8))

borrowing expenses such as loan application fees and mortgage discharge fees (s 110-35(9))

expenditure made by related parties in the corporate group on the CGT asset (s 104-10(10)).

5.5.F1CGT event F1 occurs:

when the contract for the lease is entered into;

if there is no contract, the start of the lease; or

for renewal or extension – at the start of the renewal or extension

(104-110).

The capital gain (loss) occurs where the capital proceeds are more (less) than the expenditure in relation to the grant, extension or renewal (s 104-110(3)).

The F1 event does not occur if the grant, extension or renewal is over 50 yeas, this is a F2 event.

5.6. I2A CGT event I1 occurs at the time you stop being an Australian resident (s 104-160).

You make a capital gain (loss) if the market value of asset is more (less) than its cost base (s104-160(4)).

{will have to use the market substitution rule because there are no capital proceeds.}

Individuals can disregard the capital gain (loss) until another CGT event occurs (s104-165).

6. Is there an exemption / special rules?

6.1.Certain assets{This is covered at above.}

Excluded assets:

Pre 20 September 1985 Assets

Passenger motor vehicles or motorbikes (s 118-5(a)), which are defined as those that can hold 9 or less passengers, or loads of less than 1 tonne (s 995).

Depreciating assets (s 118-24)

Trading stock (s118-25)

Compensation for personal injury or workers compensation (s 118-37)

Gambling, game or competition with prizes (s 118-37(c))

Decoration awarded for velour or brave conduct (unless you paid for it) (s 118-5(b))


CGT asset used to produce exempt income (s 118-12(1))

Collectable if 1st element of cost base is less than $500 (s 118-10(1))

Personal use asset if the 1st element of the cost base is less than $1,000 (s 118-10(3)).

6.2.Main residence

(a) Basic case

Capital gains and losses from a CGT asset that is a dwelling, or your ownership interest in the dwelling, are disregarded if:

you are an individual;

the dwelling was your main residence throughout your ownership period; and

the interest did not pass from the estate of a deceased person

(s 118-10(1)).

(i) Is it a Dwelling?

A dwelling includes:

a unit of accommodation that is a building or contained in a building that consists wholly or mainly of residential accommodation; or

a unit of accommodation that is a caravan, houseboat or other mobile home

(s 118-115(1)).

The dwelling contains the land immediately under the unit of accommodation (s 118-115(1)(c)), and adjacent land that is used predominantly for a private purpose and does not exceed 2 hectares (s 118-120). Land by itself will never be a main residence (TD 1999/73).

Adjacent does not mean touching, but must be sufficiently close (TD 1999/68).

Structures associated with the dwelling, and forms part of the CGT event, that is used primarily for private or domestic purposes are treated as part of the dwelling (s 118-120(3); Re Summer v FCT {includes sheds}).

Whether the primary purpose of the land or structure was private or domestic is a question of fact an degree.

(ii) Was the dwelling the taxpayer’s main residence during the ownership period?

A) Main residence

[TD51 withdrawn on 19 May]

Whether the dwelling is a person’s main residence is a question of fact. It will depend on factors such as:

the length of time the taxpayer lived in the dwelling


the place of residence of the taxpayer’s family

where the taxpayer’s personal belongings are kept

the taxpayer’s intention to occupy, although this is not sufficient per se (Erdelyi v Commissioner of Taxation)

the taxpayer’s address for mail and on the electoral roll

the connection of services such as phone, gas & electricity.

Here, one of the rules extending the exemption may apply (see below).

{Apply 6.(b) if appropriate}

Here, the dwelling [is OR is not] <taxpayer>’s main residence.

B) Ownership interest

<Taxpayer> has an ownership interest in the asset because:

they had a legal or equitable interest in it, or a right to occupy it; or

for a dwelling that is not a flat or home unit, you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

for a flat or home unit, you have:

a legal or equitable interest in it; or

a licence or right to occupy it; or

a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and gives you a right to occupy it

(s 118-130(1)).

Where you acquire the dwelling through a contract, you have an ownership interest in it from:

the time when you obtain legal ownership {is this registration under LTA?}; or

if the contract gives you a right to occupy the dwelling prior to obtaining legal ownership, from that point

(s 118-130(2)).

The ownership interests ends when your legal ownership ends (s 118-130(3)).

Therefore the ownership period was between __________ & __________.

Here, the dwelling [was OR was not] used as the taxpayer’s main residence throughout this period.

{IF used throughout:} Thus, the taxpayer will get the exemption.

{IF not used throughout:} However, there may be a provision that extends the exemption {apply 6.(b)}, or allows a partial exemption {see below}.


(iii) Conclusion

Therefore, because:

the taxpayer is an individual;

the asset was not acquired from a deceased estate;

the dwelling:

was you main residence throughout the ownership period; or

is deemed to have been your main residence throughout the ownership period

the exemption is available (s 118-110(1)).

(b) Extension of exemption

(i) Moving into dwelling

If the dwelling becomes your main residence as soon as it was first practicable, the dwelling is deemed to be your main residence between the start of the ownership period and when it actually becomes your main residence (s 118-135).

It is not sufficient if you are unable to move in because it has been rented out, or it is inconvenient (Re Chapman).

(ii) Changing main residence

If you acquire an ownership interest in an dwelling that is to become your main residence, both the new and existing main residence will be deemed to be your main residence until your ownership interest in the existing dwelling ends, up to a maximum of 6 moths (s 118-140(1)).

To take advantage of this:

the existing main resident must have been the taxpayer’s main residence for a continuous periods of at least 3 months in the 12 months ending when the ownership interest ends; and

the existing main residence was not used for the purpose of producing assessable income in any part of the 12 month period when it was not your main residence

(s 118-140(2)). Here, these [are OR are not] satisfied.

Here, the taxpayer acquired the interest in <new dwelling> on _______, and their ownership interest in <existing dwelling> ended on ________, which is within the 6 month period.

(iii) Absences

If <taxpayer> uses a dwelling as their main residence, you may continue to treat it as you main residence provided that you do not treat any other dwelling as your main residence (s 119-145(1)&(4)).

You may do this indefinitely if you do not use the dwelling to produce assessable income (s 118-145(3)).


If you use the dwelling to produce assessable income, then you can only treat it as your main residence for up to 6 years, resetting each time it becomes and ceases to be your main residence (s 118-145(3)).

(iv) Building, repair or renovating

The dwelling can be treated as your main residence for a period of up to 4 years where you build a dwelling on the land, or repair renovate or finish a building on the land, provided that:

it becomes your main residence as soon as practicable after the work is finished; and

it continues to be your main residence for at least 3 months

no other dwelling can be treated as your main residence

(s 118-150).

Section 118-155 deals with what happens if the taxpayer dies any time before the dwelling has become their main residence for the required 3 months after the work.

(v) Destruction of dwelling and sale of land

If the dwelling that is your main residence is accidentally destroyed, provided that you do not erect another dwelling, the land can be treated as if the dwelling had not been destroyed, and it was you main residence (s 118-160).

The exemption is not available where you have another main residence (s 118-160(3)).

(c) Rules limiting the exemption

(i) Couples / families

If you and your spouse do not permanently live separately, nut , then you must:

choose one of the dwellings as your main residence; or

nominate the different dwellings, and apportion them {apportionment: if you have an interest of less than 50% in your main residence, it is your main residence for the whole period, otherwise it will be your main residence for half the period. Applies similarly with the spouse}

(s 118-170).

If the main residence of your child who is under 18 and is dependant, you must choose one of them as the main residence for you both (s 118-175).

(ii) Separate CGT events

The exemption does not occur where the CGT event relates to land or other structures, but not the dwelling (s 118-165).


(iii) Partial exemption - apportionment

A) Non-main residence period

Where you would be entitled to the exemption, except that the dwelling was not your main residence for the whole of the ownership period, then you will be eligible for a partial exemption (s 118-185(1)).

Your capital gain (loss) is multiplied by the percentage of non-main residence days (non-main residence days ÷ days in your ownership period) (s 118-185(2)).

{ATO asserts that the First Home Owner’s Grant is subtracted from the cost base in these circumstances (ID 2008/157).}

B) Dwelling used to produce assessable income

Where also use to produce assessable income

Only a partial exemption is available where the dwelling was used for producing assessable income for all or part of the period and interest would have been deductible (s 118-190).

It is permissible to ignore the asset’s use to produce assessable income if falls within s 118-145 {absences - see above} (s 118-190(3)).

The capital gain (loss) is increased by an amount reasonable having regard to the extent to which you would have been able to deduct interest (s 118-190(2)).

Here:

interest would not be deductible because the taxpayer used the dwelling out of convenience (ITAA97 s 8-1; Handley; Forsyth); OR

interest would be deductible because the use of the residence was not merely out of convenience, but amounted to carrying on a business (ITAA97 s 8-1; Swinford).

meaining apportionment [need not OR must] be applied.

A reasonable apportionment is usually made according to floor area (TD 1999/66).

Thus, only ______% of the capital gain will be disregarded.

{need to calculate the full cost base – remembering not to include any amounts that would be deductible – and then apportion it}

Where conversion from entirely residential to income producing

If the asset was initially used solely as your main residence, and you began using the asset to produce assessable income after 7.30 pm on 20 August 1996, and you would otherwise be entitled to a partial exemption, you are deemed to have acquired the dwelling, or your interest therein, on the day you first started using it to produce assessable income (s 118-192).

{ie the market value becomes your cost base}

{both s 118-90 and 118-92 may apply.}


(d) Dwellings acquired through deceased estates

(i) Pre-CGT dwelling

Because:

the dwelling passed to <taxpayer> as a beneficiary of a deceased estate; and

the deceased acquired their ownership interest before 20 September 1985; and

the taxpayer’s ownership interest ends within 2 years of the deceased’s death if the disposal is after 20 August 1996; or

from the date of the deceased’s death to when the taxpayer’s ownership ends, the dwelling is the main residence of:

the spouse of the deased immediately before the death; or

an individual who had a right to occupy the dweliing under the deceased’s will; or

the beneficiary of the dwelling if they brought about the CGT event

the capital gain is disregarded (s 118-195).

Here, _________.

(ii) Post-CGT dwelling

The dwelling was:

acquired on or after 20 September 1985; and

the deceased’s main residence just before their death; and

not used for the purpose of producing assessable income

meaning that the capital gain will be disregarded if:

the taxpayer’s ownership interest ends within 2 years of the deceased’s death if the disposal is after 20 August 1996; or

from the date of the deceased’s death to when the taxpayer’s ownership ends, the dwelling is the main residence of:

the spouse of the deased immediately before the death; or

an individual who had a right to occupy the dweliing under the deceased’s will; or

the beneficiary of the dwelling if they brought about the CGT event

(s 118-195).

Here, ______.


6.3.Deceased estates

(a) Effect on estate and personal representative

Capital gains or losses from CGT events on CGT assets you owned before dying are disregarded (s 128-10).

This does not apply if a K3 event occurs {occurs when you bequest to a tax advantaged entity such as an exempt entity (defined in 11-5), a trustee of a complying super fund or a foreign resident} (s 104-215). If it is a K3 event, the deceased estate has to pay the tax on the market value of the asset at the time of death.

The legal personal representative of the deceased is not liable for CGT on CGT assets they pass to a beneficiary (s 128-15(3)).

The legal personal representative is deemed to acquire the asset on the day that it person died (s 128015(2)).

A CGT asset passes to a beneficiary if the beneficiary becomes an owner:

under the will (or as varied by the court)

by operation of an intestacy law

it is appropriated to the beneficiary by the legal representative

under a deed of arrangement

(s 128-20).

An asset does not pass to a beneficiary if it is sold to them (s 128-20(2)).

(b) Effect on beneficiary

The beneficiary is deemed to acquire the asset on the day that it person died (s 128015(2)).

The first element of the beneficiary’s (or legal personal representative’s) cost base is:

the cost base of the deceased on the day they died, because they acquired it on or after 20 September 1985 and it was not their main residence;

the market value of the asset on the day <deceased> died, because it was acquired by them before 20 September 1985;

the market value of the dwelling on the date of death, because the dwelling was <deceased>’s main residence just before their death;

(s 128-15(4)).

The cost base also includes any expenditure that the legal personal representative would have been able to include, as of the day it was incurred by the personal representative (s 128-15(5)).


6.4.Deemed separate assetsThe ITAA97 deems assets that would be considered one asset at general law, to be separate assets for the purpose of CGT (s 108-50).

These include:

A building or structure on land that the taxpayer acquired on or after 20 September 1985 if the building or structure is a depreciating asset or for research and development (s 108-55(1)).

A building or structure constructed on land that you acquired before 20 September 1985 where the contract for construction was entered into, or if there was no contract, construction began, on or after 20 September 1985 (s 108-55(2)).

A depreciating asset that is part of a building or structure (s 108-60).

Adjacent land that has been amalgamated into one title where once lot was acquired prior to 20 September 1985 and another acquired after 20 September 1985 (s 108-65).

Where you make a capital improvement to an asset acquired before 20 September 1985, and the cost base of that asset is more than:

the improvement threshold ($112,512 in 06/07; $116,337 in 07/08; $119,594 in 08/09); and

more than 5% of the capital proceeds of the event (s 108-70(2)).

If one of these apply apportionment must be made between the 2 assets a method of apportionment may be respective cost bases. See apportionment of capital proceeds below.

6.5.Marriage breakdownSub-division 126-A of the ITAA97 applies where there is a binding agreement between, or order against, the parties under the Part VIIAB or s 87 of the Family Law Act.

In such a situation, the CGT event is ignored, and the asset rolls over.

As such, the transferor spouse disregards any capital gain or loss (s 126-5(4)), while the transferee spouse makes the gain or loss when they subsequently dispose of the asset.

The cost base carries over.

Pre-CGT assets remain that way.

The CGT Event must happen because: Court order under FLA or a corresponding foreign law: s 126-5(1)(a) Maintenance agreement approved by the court under s 87 FLA or a similar agreement under a

foreign law: s 126-5(1)(b) A court order under a state, territory or foreign law relating to de facto marriage breakdowns Financial agreement under Part VIIIA of the Family Law Act 1975: s 126-5(1)(d) Arbitration – Section 13H - Family Law Act 1975: s 126-5(1)(e)

Only applies to

> disposal case A1 and B1: s 126-5(2)(a)

> creation case D1, D2, D3 and F1: s 126-5(2)(b)

Transferor

A capital gain or loss made by the transferor is disregarded: s 126-5(4)


Transferee

Transferor Acquired asset post 20 Sep 1985:

The first element in the cost base is the asset’s cost base at the time the transferee acquired it: s 126-5(5)(a)

No roll-over

Questions to ask

Who owns the asset(s)?: Husband Wife Company / Trust

When were the assets purchased?

What kind of asset is it? CGT Asset – main residence exemption Collectable Personal use asset.

Only applies to certain CGT events:

Disposal Case: A1, B1 (provided title passes before the end of the agreement)

Creation Case: D1, D2, D3 and F1

Pre-CGT Asset

Roll-over relief applies, the transferee acquires pre-CGT asset and any gain or loss will be disregarded.

NOTE: Separate CGT asset if major capital improvements.

No Roll-over relief applies where: Transferor has a pre CGT gain Transferee has a post CGT Asset Has cost base at date of acquisition (mkt value)

Post-CGT Asset

Roll-over relief applies and the transferor’s gain or loss disregarded.

Transferee acquires a CGT asset at transfer time at cost base of transferee.

No Roll-over relief applies: Transferor dispose at market value: CGT gain / loss Transferee acquires a CGT Asset Transferee has a cost base of market value at date of acquisition.

Impact on the Cost Base (TD 1999/57)

Costs of transfer (conveyancing fees, stamp duty etc) are included in the cost base of the transferor and therefore Element 1 of transferee.

General legal costs associated with the divorce are not included in the cost base

To avoid roll over relief applying Sell assets to a 3rd party and distribute the proceeds Transfer assets independently of a court order A separation which is not recognised by the Family Court.


7. Capital Proceeds

7.1.General ruleCapital proceeds is comprised of:

the money received, or entitled to receive, in respect of the event, here $_____; or

the market value of any property received or entitled to receive, here $______

(s 116-20(1)). Totalling proceeds of $__________.

The capital proceeds of an F1 event are defined as any premium paid or payable to you for the grant, renewal or extension (s 116-20(2)).

Because <taxpayer> is registered for GST, and the CGT asset is a taxable supply, then GST is excluded from the capital proceeds.

7.2.ModificationMarket value substitution rule

The market value substitution rule applies where:

no capital proceeds were received (s 116-30(1))

some or all of the capital proceeds cannot be valued (s 116-30(2)(a))

the capital proceeds are more or less than the market value and (i) it was not an arms length transaction, or (ii) it is a C2 event (s 116-20(2)(b)).

This rule does not apply to D1 events (s 116-30).

The market value is calculated at the time of the CGT event (s 116-30).

Apportionment rule

Where a transaction relates to more than one CGT event, the capital proceeds must be apportioned between the events (s 116-40).

{this may apply for deemed separate assets. If so, read with above.}

Non-receipt rule

The capital proceeds are reduced by the amount you are unlikely to receive, provided you took all reasonable steps to obtain the amount and it is not because of anything the taxpayer did (s 116-45).

Repaid rule

The capital proceeds are reduced by the amount you repay, or any compensation you pay that may be reasonably regarded as a repayment of them (s 116-50). This can include giving property back (s 116-50).

Another entity assumes liability (ie subject to mortgage)

The capital proceeds are increased if another entity acquires the asset subject to a liability (such as a mortgage or other security) over the asset, by an amount equal to the liability (s 116-55).

Misappropriation rule

The capital proceeds are reduced by any amount misappropriated by an agent or employee (s 116-20).


8. Cost BaseThe cost base must be net of input tax credits on those expenditures (s 103-30).

8.1.Ordinary cost baseThe asset’s cost base consists of 5 elements (s 110-25(1)).

If the taxpayer can claim input tax credits, these must be removed from the cost base.

Some CGT events do not have CGT events, including D1 & F1 (s 110-10).

(a) Element 1 – money paid or property given

The first element of the cost base includes all money, or the market value of any property, you have or are required to provide (ITAA 2 110-25(2)).

Here, because <taxpayer>:

did not incur expenditure to acquire the asset

some or all of their expenditure cannot be valued (only substituted if more than the market value)

you did not deal at arm’s length with the other entity in connection with the acquisition (only substituted if more than the market value)

then the market value at the time of acquisition forms this cost base (s 112-20).

Here, the value of the 1st element of the cost base is $_________.

(b) Element 2 – incidental costs

The second element of the cost base is incidental costs incurred (which can include giving property) (s 110-25(3)).

Incidental costs include:

remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor (s 110-35(2))

costs of transfer (s 110-35(3)

stamp duty or similar (s 110-35(4))

cost of advertising or marketing (s 110-35(5))

costs of making valuation or apportionment under Part 3-1 or 3-3 (s 110-35(6))

search fees (s 110-35(7))

conveyancing kit (s 110-35(8))

borrowing expenses such as loan application fees and mortgage discharge fees (s 110-35(9))

[Lecture slides say there are only 5 types]

Expenditure does not form part of the cost base to the extent that you have or can deduct it (s 110-40(2) {pre 7.30pm on 14 May 1997}; s 110-45(1B) {post 7.30pm on 14 May 1997}).

Here, the value of the 2nd element of the cost base is $_________.Matthew Robinson LWB364 Introduction to Taxation Law 62

(c) Element 3 – non-capital costs of ownership

Here, we cannot include element 3 of the cost base because:

the asset was acquired on or before 20 August 1991 (s 110-25(4))

the asset is a collectable (s 108-17)

the asset is a personal use asset (s 108-30)

The 3rd element of the cost base includes:

interest on money borrowed to acquire the asset

costs of maintaining, repairing or insuring the asset

rates or land tax, if the asset is land

interest on money you borrowed to refinance the money you borrowed to acquire the asset

interest on money you borrowed to finance the capital expenditure you incurred to increase the asset’s value.

You cannot include expenditure in your cost base to the extent that you have or can deduct it (s 110-40(2) {pre 7.30pm on 14 May 1997}; s 110-45(1B) {post 7.30pm on 14 May 1997}).

Here, the 3rd element of the cost base is $____________.

(d) Element 4 – Capital expenditure to increase / preserve value

For CGT events on or after 1 July 2005, the 4th element of the cost base includes capital expenditure that relates to installing or moving the asset, or whose purpose or expected effect was to increase or preserve the asset’s value (s 110-25(5))

Expenditure on good will is not included (s 110-25(5A)).

Initial repairs are included in this (TD98/19)

{For CGT events prior to 1 July 2005, the rule is that the expenditure increases the value, and it is reflected in the asset at the time of the CGT event.}

Here, the 4th element of the cost base is $_____________.

(e) Element 5 – Capital expenditure to establish title

The 5th element of the cost base is capital expenditure you incurred to establish, preserve or defend your title or right in the asset (s 110-25(6)).

This can only apply to acts done after the CGT asset has been acquired.

Here, the 5th element of the cost base is $____________.

(f) Total cost base

Thus, the total cost base is $_________________.

(g) Modifications

These are contained at ss 112-20 to 112-35 and include: market value substitution,

split or changed asset rules, apportionment and assumption of liability rules.


8.2.Reduced cost baseThe reduced cost base is used where the cost base exceeds capital proceeds.

The reduced cost base does not include the 3rd element, it is replaced with any balancing adjustments made for the asset that increases your assessable income (because it will not include amounts that are deductible.) (s 110-55).

{the reduced cost base is not indexed}

8.3. Is indexation available?Here, the taxpayer can (cannot) use indexation because:

the asset was acquired before (after) 21 September 1999 (s 114-1); and

the asset was acquired more (less) than 12 months before the CGT event (s 114-10) {certain exceptions such as for deceased estates and surviving joint tennants}.

The 3rd element of the cost base is not indexed (s 960-275(4)).

Indexation cannot be applied to the reduced cost base.

The taxpayer may elect whether to apply indexation (s 114-5)

8.4.DiscountHere, <taxpayer> can (cannot) apply the discount provisions because:

the CGT event occurred on _______, which is after (before) 11:45am on 21 September 1999 (s 115-15);

the taxpayer hasn’t (has) applied the indexation provisions (s 115-20);

the asset was acquired on _______, which is more than 12 months before the CGT event of _________ (s 115-25);

the CGT event is not an excluded event (the event is excluded because it is a D1 or F1 event) (s 115-25(2)).

The capital gain is reduced by the discount percentage (s 102-5).

Here, the discount is:

50% because the taxpayer is an individual (s 114-100(1)(i))

50% because the taxpayer is a trust that is not a complying super fund (s 115-100(a)(ii))

33.33% because the taxpayer is a complying super fund (s 115-100(b)).

8.5.Discount v indexation comparisonAcquisition CGT? Indexation? Discount?

Before 20 September 1985 No N/A N/A

Between 20 September 1985 and 20 August 1991

Yes, but cannot include 3rd element of cost base

YesOnly if CGT event

occurred after 21/09/1999.

Between 20 August 1991 and 21 September 1999

Yes YesOnly if CGT event

occurred after 21/09/1999.

After 21 September 1999 Yes No Yes


9. Anti-overlap provisionsThe capital gain is reduced to the extent another provision of the act includes the amount in assessable or exempt income (s 118-20(1)).

{I think the most likely time this will come up in the exam is for restrictive covenants – will need to discuss restrictive covenants under ordinary income concepts}

10. CGT calculationFor CGT events, such as A1:

1. Work out the capital proceeds.

2. Subtract the cost base.

3. If there is a capital gain, apply the indexation or discount provisions.

4. This is your capital gain.

5. If the cost base is large than the capital proceeds, calculate the reduced cost base. If the reduced cost base is large than the capital proceeds, you have a capital loss; if the cost base is less than the capital proceeds, you don’t have either a capital gain or loss.

{do for each asset}

Here, the capital gain is:

(capital proceeds of $_______ - cost base of $_________) x Discount of 50% = $________.


Goods and Services Tax

1. Is <taxpayer> required to be registered?An entity is required to be registered for GST if:

they are carryon on an enterprise; and

its GST turnover meets the registration turnover threshold

(GSTA s 23-5). Entity is defined broadly in GSTA s 184-1 (includes trust & partnership).

An entity carrying on an enterprise may register despite being under the income threshold (GSTA s 23-10(1)). May also register if intending to commence carrying on an enterprise (GSTA s 23-10(2)). However, Taxi-drivers must be registered regardless of turnover: Div144.

1.1.Carrying on an enterpriseAn enterprise is an activity, or series of activities, including:

a business (including any profession, trade, employment, vocation or calling)

adventure or concern in the nature of a trade

leasing, licencing or granting, an interest in property on a regular or continuous basis

Deductible gift recipients under the ITAA 1997

complying superannuation fund

charities and religious institutions

(GSTA s 9-20).

“Carrying on” includes commencement and termination activities (GSTA s 195-1).

The activity is not in carrying on enterprise because it is done:

as an employee or PAYG earner

as a private recreational pursuit or hobby

by an individual or partnership of individuals without reasonable expectation of profit or gain

as a member of a local government body.

1.2.Turnover thresholdAn entity is above the turnover threshold if their current GST turnover or projected GST turnover is above the threshold (GSTA s 188-10).

The threshold is $75,000 (or $150,000 for not-for-profits) {as of 1 July 2007} (Reg 23.15.01 & .02).

The entity’s current GST turnover is the values of the supplies (that are for consideration, in the course of the enterprise and not input taxed) it has made during the 12 months ending at the end of that month (GSTA s 188-15).

The entity’s projected GST turnover is the values of the supplies (that are for consideration, in the course of the enterprise and not input taxed) it has made, or is likely to make during that month, and the next 11 months (GSTA s 188-15).


2. Is it a Taxable Supply?GST is payable on taxable supplies (GSTA s 7-1(1)). {are also importations}

<taxpayer> makes a taxable supply if:

they make a supply for consideration

the supply is made in the course or furtherance of an enterprise that they carry on

the supply is connected with Australia

the taxpayer is registered or required to be registered

the supply is not GST free or input taxed

(GSTA s 9-5).

The taxpayer will have made a taxable supply under GSTA s 9-5 if the following are satisfied:

2.1.Did <taxpayer> make a supply?There must have been a supply (GSTA s 9-5).

Supply is defined broadly in GSTA s 9-10 as any supply whatsoever, including:

a supply of goods (which includes any tangible property: GSTA s 195-1).

a supply of services

provision of advice or information

a grant, assignment or surrender of real property

a creation, grant, transfer, assignment or surrender of any right

a financial supply

an entry into, or release from, an obligation

to do anything

to refrain from an act

to tolerate an act or situation.

Lawfulness is irrelevant (GSTA s 9-10(3)).

A supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money (GSTA s 9-10(4)).

Here, _______________ is clearly a supply.

2.2.Was the supply for consideration?Consideration must have been provided (GSTA s 9-5).

Consideration includes any payment, or act of forbearance, in connection with a supply (GSTA s 9-15).

Consideration need not be voluntary, nor provided by the recipient of the supply (GSTA s 9-15(2)).

Consideration is received:

in the case of cash, when tendered


in the case of credit cards, upon signature of the cardholder

in the case of EFTPOS, when accepted

(GSTR 2003/12).

Gifts are not taxable supplies.

A deposit is not consideration unless and until it is forfeited (Reliance Carpet).

Here, ________.

2.3.Was it made in the furtherance of an enterprise the taxpayer carries on?

The supply must have been made in the furtherance of an enterprise the taxpayer carries on (GSTA s 9-5).

An enterprise is an activity, or series of activities, including:

a business (including any profession, trade, employment, vocation or calling)

adventure or concern in the nature of a trade

leasing, licencing or granting, an interest in property on a regular or continuous basis

Deductible gift recipients under the ITAA 1997

complying superannuation fund

charities and religious institutions

(GSTA s 9-20).

“Carrying on” includes commencement and termination activities (GSTA s 195-1).

The activity is not in carrying on enterprise because it is done:

as an employee or PAYG earner

as a private recreational pursuit or hobby

by an individual or partnership of individuals without reasonable expectation of profit or gain

as a member of a local government body.

2.4. Is there a connection to Australia?The supply must be connected to Australia (GSTA s 9-5).

Here, the supply is connected to Australia, because:

the goods were delivered or made available in Australia (s 9-25(1))

the goods were removed from Australia (GSTA s 9-25(2))

the goods were imported to, or assembled in Australia (GSTA s 9-25(3))

the real property is in Australia (GSTA s 9-25)

the supply of services (or anything except goods or real property) is done in Australia or makes a supply through an enterprise the supplier carries on in Australia (GSTA s 9-25(5)).


2.5. Is the taxpayer registered/required to be registered?As discussed above, <taxpayer> is [registered OR required to be registered OR not required to be registered] (GSTA s 9-5).

2.6.The supply is not GST-free or input taxedThe supply cannot be GST-free or input taxed (GSTA s 9-5).

{GST is not charged on these items}

{note however that for input taxed goods, you cannot claim input tax credits}

(a) GST-free

A supply is GST-free if:

it is so under Division 38, or another provision of another Act; or

is a right to receive such a supply

(GSTA s 9-30(1)).

This includes:

Food (which includes beverages)

Food is defined in GSTA s 38-4(1) as food or beverages for human consumption (and their ingredients), goods to be mixed with food for human consumption, and fats & oils marketed for culinary purposes.

Food is not defined as live animals (other than crustaceans or molluscs), unprocessed cows milk, grain, cereal or sugar cain not subject to any process, and plants under cultivation (GSTA s 38-4(1).

The following are exceptions to the food exemption: food consumed on premises (GSTA s 38-5), hot takeaway food, prepared meals and food (Schl 1), confectionary, savoury snacks, icecream and biscuits (Schl 1), bakery goods (Schl 1), caviar, and water that is carbonated or has other additives.

Education

Health

Child care

Religious services

Charities

Water

Going concerns

Transport.

(b) Input taxed

A supply is input taxed if:

it is so under Division 40 or under a provision of Another ActMatthew Robinson LWB364 Introduction to Taxation Law 69

it is a right to receive such a supply

(GSTA s 9-30(2)).

Division 40 includes:

Financial supplies: GSTA s 40-5

Residential rent: GSTA s 4-35

Residential premises: GSTA s 4-65

precious metals: GSTA s 40-100

School tuckshops: GSTA s 40-130

A supply is not input taxed, where it is GST-free (GSTA s 9-30). {anti-overlap}

3. GST payableGST is payable on 10% (or 1/11th of the purchase price) of the value of the taxable supply (GSTA ss 9-40, 9-70 & 9-75).

4. Is it a Creditable Acquisition?Input tax credits are available for creditable acquisitions (GSTA ss 7-1(2) & 11-20). {are also importations}

A registered entity is entitled to an input tax credit for creditable acquisitions they make (GSTA s 11-20).

You make a creditable acquisition where:

you acquire something solely or partly for a creditable purpose

the supply of the thing to you is a taxable supply

you provide, or are liable to provide consideration of the supply

(GSTA s 11-5).

4.1.Acquisition{acquisition is basically the converse of supply}

Acquisition is broadly defined in GSTA s 11-10, including:

an acquisition of goods or services

a receipt of advice or information;

an acceptance of a grant, assignment or surrender of real property;

an acceptance of a grant , transfer, assignment or surrender of any right;

an acquisition a financial supply;

an acquisition of a right to require another person:

to do anything; or

to refrain from an act; or

to tolerate an act or situation;

any combination of any of the above


Here, ________ is clearly an acquisition.

4.2.Creditable purposeYou acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (GSTA s 11-15(1)). However, it is not a creditable purpose if:

the acquisition relates to supplies that are input taxed; or

the acquisition is of a private or domestic nature

(GSTA s 11-15(2)).

{Consider “carryong on enterprise” & input taxed above. Also refer to private / domestic in deduction notes.}

Here, the acquisition was [solely OR partly OR not] for a creditable purpose.

Because the acquisition is only partly creditable, it must be apportioned as follows:

€

Full input tax credit × extent of creditable purpose × Extent of consideration

Where extent of consideration is how much you provide (GSTA s 11-30).

4.3. It is a taxable supply{apply taxable supply above for the thing you are acquiring}

4.4.You provide consideration{same as taxable supply}

Here, __________ is consideration (GSTA s 11-5).

5. Input tax creditsThe quantum of the input tax credit is the amount of GST payable on the supply (GSTA s 11-25). Thus, the input tax credit will be 1/11th of the purchase price (GSTA ss 9-40, 9-70 & 9-75).

You cannot claim an input tax credit without a Tax invoice at the time of lodging the GST return, except for small value supplies (GSTA s 29-80).

6. Total GST liabilityThe taxpayer’s net GST liability is the GST collected less input tax credits (GSTA s 7-5).

The tax period is generally every 3 months unless a monthly period selected (GSTA ss 27-5 & 27-10).


Fringe Benefits Tax

1. Hisotry Commenced 1 July 1986

The Fringe Benefits Tax Assessment Act 1986 (FBTAA) contains the core provisions, while the Fringe Benefits Tax Act 1986 (FBT) imposes the tax and the rate.

2. Fringe benefit & <taxpayer>’s assessable incomeIncome derived by a taxpayer by way of fringe benefit is non-assessable, non-exempt income (ITAA36 s 23L).

The fringe benefit is on the taxpayer’s payment summary if the total value is greater than $2,000.

The reportable amount is grossed up at 1.8692.

{Although this does not count towards assessable income, it may be relevant vis-à-vis HELP payments, the medicare levy & maintenance payments}

3. Liability to payFringe Benefits Tax is imposed on the employer (FBTAA s 66).

4. Is there a fringe benefit?A fringe benefit is defined as a benefit provided to an employee (or an associate) during the FBT year by their employer (or associate, or 3rd party arranger), in respect of the employment (FBTAA s 136).

4.1.BenefitBenefit is broadly defined in FBTAA s 136 to include any right, privilege, service or facility.

Here, ________.

4.2.Excluded benefitsFringe benefits do not include:

salary & wages (s136(1)(f)).

Payments to a complying super fund (s 136(1)(j)).

Employment Termination Payments (s136(1)(lc)) or genuine redundancy payment (s136(1)(lb).

There are also exempt benefits under Division 13 and within each division, including:

Section 17 - (exempt loan benefits)

Section 21 - (Exempt accom exp pmt)

Section 58P - (Minor benefits)

Section 58X - (work related items)


Newspaper & periodicals for business purposes s 58H

Membership fees and subscriptions s 58Y

Taxi travel begin or end at work s 58Z

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

4.3.Provided during the FBT yearProvide is defined to include:

for a benefit - allowing, conferring, giving, granting or performing

for property – disposing by sale, gift or declaration

(FBTAA s 136).

A provision will occur by the employer ‘turning a blind eye’ to the provision, such as where an employee is not given the use of a work car, but is not prevented from using it on the weekend (FBTAA s 148(3)).

Here, the benefit was provided on ________, which is between 1 April and 31 March of the year.

4.4.Provided by employer, associate, 3rd party arrangerEmployer is defined as a current, future or former employer other than the Commonwealth (FBTAA s 136(1)).

Associate is defined as a relative or partner of an individual, or a company that is sufficiently influenced by the individual, or whom the person holds a majority voting interest in the company (FBTAA s 159 & TIAA36 s 318). {more definitions for other kinds of entities}

4.5.Provided to an employee or an associate of the employee

An employee is defined as a current, future or former employee (FBTAA s 136).

Associate is defined as a relative or partner of an individual, or a company that is sufficiently influenced by the individual, or whom the person holds a majority voting interest in the company (FBTAA s 159 & TIAA36 s 318).

A person is deemed to be an associate if the 3rd party receives a benefit under an arrangement between the employee and employer (FBTAA s 148(2); ATO ID 2003/7).

The employee or associate must be identifiable.

It does not matter that a person has a dual capacity {ie employee and member} (FBTAA s 148(1)(a)).

4.6. In respect of the employment of the employeeIn respect of employment means by reason of, or virtue of, directly or indirectly, employment (FBTAA s 136(1)).

FBTAA s 148(1)(f) provides that benefits may still be in the course of employment even if it is not used in respect of employment.

Gifts will generally not be in respsect of employment.


Here, the benefit of ______________, [would OR would not] have been provided to the recipient if they had not been an employee, meaning the benefit [is OR is not] in respect of employment.

5. What is the taxable value of the fringe benefit?

5.1.Taxable valueThe taxable value of each fringe benefit must be determined.

Car Fringe benefits {not covered}

Expense payment benefit {reimbursement cf allowance} – the valuie of the benefit (FBTAA ss 20 & 23). There are specific exemptions to this, including a no private use declaration {employer declares that no payment is made for private or domestic expenses} (FBTAA s 20A); accommodation expenses incurred because they are required to live away from their usual residence because of employment (FBTA s 21); car expenses where the reimbursement is calculated according to the distance travelled (FBTA s 22).

Property fringe benefit – where property is provided (unless provided in respect of employment and is consumed on a working day on the employer’s premises: s 41) – the cost price of the property (FBTAA ss 41&43).

Debt waiver fringe benefit – where there is a waiver of an obligation to pay an amount (FBTAA s 14) – the amount of the repayment (FBTA ss 14 & 15). This does not include debts that have been waived for commercial reasons – only employment reasons.

Loan Fringe Benefit – this occurs where:

The recipient is under an obligation to repay a loan (FBTAA s 16(1))

The employer lets a debt run past it’s due date (FBTA s 16(2))

A loan on which interest accrues but is not payable at least every 6 months (FBTAA s 16(3)).

but does not include loans from a bank to a staff member on commercial terms (FBTAA s 17(1)&(2)), current employee employment related expenses incurred within 6 months (FBTAA s 17(3)), or a temporary advance to pay security deposits (FBTAA s 17(4)). The value of the benefit is the difference between the notional interest rate specified under the act (FBTAA s 18) and the actual interest charged.

{See Study Guide at about page 101 for more detail on other fringe benefits.}

Note in house benefit provisions, which are not examinable.

5.2.ReductionsThe taxable value is reduced by:

the recipient’s contribution

the extent that the recipient could have claimed a deduction if they had paid for it themselves. {does not apply to associates}

The benefit must be a loan, expense payment, airline transport, board, property or residual benefit.


The recipient must be the employee.

It does not apply where the deduction is for depreciation.

{apply deductibility rule}

miscellaneous reduction amounts.

6. FBT liability

6.1.Fringe benefits provided{will need to cover GST first, to determine ITC}

Here, the total benefits provided:

for which the employer can claim GST input tax credits (Type 1) is $________ (FBTAA s 5B(1B)).

for which no input tax credits are claimable (Type 2) is $__________ (FBTAA s 5B(1C)).

Note aggregate non-exempt amounts under s 5B(1E) to (1L), for hospitals and benevolent institutions.

6.2.Grossing up{purpose is to increase the value so that it shows the after-tax benefit}

The taxable benefit must be grossed up under FBTAA s 136AA, so that the aggregate taxable benefit for:

type 1 benefits is multiplied by 2.0647; and

type 2 benefits is multiplied by 1.8962.

6.3.Total FBT LiabilityThe grossed up benefits are multiplied by FBT rate.

The FBT rate is taxed at the top marginal tax rate plus the Medicare levy {ir 48.5% before 1 July 2006 & 46.5% post 1 July 2006}

7. Deductibility of FBTPrior to 1 April 1994, there was no deduction for FBT, but could deduct the cost of the benefit.

Between 1 April 1994 & 30 June 2000, deductions were allowable under ITAA97 s 8-1, and could deduct the cost of the benefit.

From 1 July 2000 onwards, FBT was deductible under ITAA97 s 8-1, but the benefits were divided into type 1 benefits (input tax credits claimed) and type 2 benefits (no input tax credit claimed). The cost of the benefit was deductible.

8. Administrative issuesThe employer is required to report the grossed up taxable value of fringe benefits over a threshold of $2,000.


Payments of FBT are generally payable within 28 days of the end of the FBT year. The Commissioner may extend the time for payment (FBTAA s 92).

Where the FBT liability is less than $3,000, the payment is made when the return is lodged.

Where the FBT liability is greater than $3,000, the payment must be made in quarterly BAS statements (FBTAA s 103).

FBT is self-assessed (FBTAA s 92).

The FBT year is from 1 April to 31 March.

FBT is payable regardless of profit or loss.

Other:

Commissioner can ‘default’ assess

Public and private rulings

General Anti-avoidance provision

Access and information gathering powers

Penalties

Failure to lodge

False or misleading statements


Other classes of taxpayer

1. Partnerships

1.1.Does a partnership exist?Under the Partnership Act 1891 (Qld) s 5(1), a partnership is defined as a group of people carrying on a business in common with a view of profit. This is expanded by ITAA97 s 995-1, to include an association of persons in receipt of income jointly.

Whether a business is carried on as a partnership (including husband and wife) is determined by examining:

• mutual assent and intention

• joint ownership of business assets

• registration of business name

• joint business account and power to operate account

• extent to which parties are involved in the business

• extent of capital contributions

• entitlement to a share of net profits

• business records

• trading in joint names and public recognition of partnership

(TR94/8).

A child is unlikely to be a partner (Case 24 7 TBRD {7 year old was incapable of understanding the legal relationship.}).

A partner can be any kind of legal entity {ie trusts, partnerships, companies and individuals can be partners}.

1.2. Interest in profit/lossAlthough if the partners are carrying on a business they may determine the interests in the profits and losses, if the partnership is based on income received on jointly held property, the appropriate reapportionment is based on the respective ownership interests of the asset (FCT v McDonald; TR93/32).

FCT v McDonald

Facts: The taxpayer and their spouse purchased a rental property as joint tenants. They had a written agreement whereby the taxpayer was to accrue all losses, and 25% of the profits (whereas the spouse got 75% of the profits). The taxpayer claimed losses over successive years.

Held: If the partnership is based on income received on jointly held property, the appropriate reapportionment is based on the respective ownership interests of the asset. So here, as the property was held as joint tenants, the appropriate shares were 50:50.


1.3.Calculation

(a) General rules

For the purposes of the partnership’s tax return, they are assessed as a resident taxpayer (ITAA36 s 90(1){profit} or (2) {loss}).

The Partnership must lodge a return for the partnership, but do not pay tax on it (ITAA36 ss 90 & 91). The partnership is not a separate legal entity (Rose v FCT; Tikva Investments Pty Ltd v FCT).

(b) Net income partnership

The net income of a partnership (NIP) is its assessable income less allowable deductions.

This is calculated in as with the income of an individual, except certain deductions are excluded:

• Personal contributions to a superannuation fund (ITAA97 s 290-150).

• Losses from previous years are not deductible for the partnership (ITAA97 Div 36) {the partners can claim this in their individual tax returns}.

{Determine income and deduction as per notes}

Adjustments are made for:

• Partnership salaries – because a partnership cannot employ a partner, any salaries represent a distribution of partnership income. A partner salary cannot be distributed unless there is money to be distributed. If a salary exceeds the partnership income, the entitlement to the salary is carried forward to later years (TR 2005/7).

• Drawings – these are not deductions, they are treated as prepayments of the distribution of profits.

• Loans by a partner to the partnership

• Interest on capital accounts

• Partnership borrowing to reduce capital accounts.

(c) Allocation of profit (loss)

The share of the profits (loss) is included in the partners’ individual tax returns (ITAA36 s 92). This occurs regardless of whether the individual has received the amounts (Rose v FCT).

A resident partner is assessable on income attributable to all sources (ITAA36 ss 92(1)(a)&(2)(a)).

A non-resident partner is assessable on their share of partnership income attributable to Australian sources only (ITAA36 ss 92(1)(b)&(2)(b)).

Here, <resident taxpayer> is assessed on ________% of all income of the partnership, amounting to $_________ x ____% = $___________.

Here, <non-resident taxpayer> is assessed on ________% of Australian income of the partnership, amounting to $_________ x ____% = $___________.


2. Trusts

2.1.Types of trust Bare or simple trust

Fixed trust

Discretionary trust

Unit trust

A trust may be created inter vivos, by will, or by operation of law.

Beneficiaries of fixed or unit trusts have a proprietary interest in all the property the subject of the trust (Charles v FCT).

A beneficiary of a discretionary trust has no interest in the trust property until the trustee exercises a discretion in their favour (CSD v Livingston). Their only right is to have the trust duly administered, and the trustee to comply with their duties (CSD v Livingston).

2.2.Net income of the trust (NITE)

(a) General rule

The net income of the trust is determined as if it were a resident taxpayer, meaning its taxable income is its assessable income less allowable deductions (ITAA36 s 95).

The allowable deductions exclude:

Income equalisation deposits

In respect of life tenants and income only beneficiaries, previous years losses are required to be met out of corpus

(ITAA36 s 95(1)).

(b) Income and deductions

(i) Assessable income generally

{Apply assessable income / allowable deductions}

(ii) Capital gains as income

Problems arise where the trust treats capital gains as the capital of the trust, but tax law treats it as statutory income.

If a quantum approach is adopted, the trustee will be taxed on the excess ‘net income’, whereas the beneficiary will be taxed under a proportionate approach. The High Court adopted the proportionate approach in FCT v Bamford [2010] HCA 10.

FCT v Bamford [1010] HCA 10

Facts: There was a discretionary trust. The capital of the trust was realised. The commissioner had conflicting arguments, arguing that in one year, income was according to ordinary concepts, but in another, that it should include CGT.


Law:

HC used trust law concepts to determine whether cash flows were income.

Held that the trustee was not liable for tax under s 96

Held that the money was capital and not income under s 95.

The HC adopted a proportionate approach, so that you pay your proportion of the income. Under this approach, the taxpayer will pay tax on income they don’t actual receive.

Held that s 97 ought to be given it’s ordinary meaning.

(c) Conclusion

Here, the trust’s assessable income is $___________.

Here, the trust’s allowable deductions is $ __________.

Therefore, the NITE is $__________.

2.3.Who is taxed?The trustee is not liable to pay tax unless required to by the Act (ITAA36 s 96).

Present entitlement?

A present entitlement is a legal right to demand immediate payment (FCT v Whiting {The taxpayer was the executors and trustees of a deceased estate. The will provided the residue was to be provided to his widow and children as an annuity. 10 years after the death, the liabilities had not been finalised, however there were credits in the books of account income for the benefit of the beneficiaries. The court HELD that the beneficiaries were not presently entitled because they could not get the residue paid to them because the liabilities of the estate had not been paid. The court determined that a vested right that may never eventuate is not sufficient.}).

In Taylor & Anor v FCT {Beneficiary was under a legal disability. The trust provided the income was to be paid to the parents for the taxpayer’s education, with any excess reinvested for the beneficiary absolutely. For the relevant year, all income was reinvested with none being paid to the parents.}, the court held presently entitled to include where:

The beneficiary had an absolute and indefeasible interest vested in possession.

Income is available for distribution and immediate payment could be demanded.

But for the disability, the beneficiary would have been able to demand payment of the income.

It is only the disability that prevents entitlement, the person is presently entitled.

There is no present entitlement if the right is contingent.

There is no requirement that the person receives a distribution.

A person has a deemed present entitlement under ITAA36 s 101 where:

There is a discretionary trust

The trustee exercises its discretion

The discretion is exercised in favour of the beneficiary.


A person has a deemed present entitlement under ITAA36 s 95A(2) where the entitlement is:

Vested (cf contingent); and

Indefeasible.

Resident?

The relevant date of residency is the end of the year of income.

{apply test of residency}

Legal disability?

A person is under a legal disability if they cannot give a valid discharge for a payment made to them (FCT v Taylor). This includes:

A bankrupt

A person under a mental disability

Minors (<18 years).

(a) Presently entitled resident without a legal disability

Because <beneficiary> is presently entitled, an Australian resident and not under a legal disability, then the beneficiary is taxed on the distribution (ITAA36 s 97).

This includes those who are deemed to be presently entitled under s 101 {discretionary trust}, but not s 95A(2) (ITAA36 s 97(2)(a)).

The taxable amount is the share of the income of:

Whole trust estate, while they are an Australian resident (s 97(1)(a)(i)).

The trust estate sourced in Australia for the period the person was a non-resident (s 97(1)(a)(ii)).

Thus, the income of $____________ will be taxable in the hands of <beneficiary>.

(b) Presently entitled resident under a legal disability

Because the beneficiary is a presently entitled resident, but under a legal disability, the trustee is taxed at the beneficiary’s marginal tax rate (ITAA36 s 98(1)).

The taxable amount is the share of the income of:

Whole trust estate, while they are an Australian resident (s 98(1)(a)).

The trust estate sourced in Australia for the period the person was a non-resident (s 98(1)(b))).

Thus, the trustee will pay tax on the $____________.

Beneficiary’s tax return

If the beneficiary has no other income, they do not need to lodge a tax return.

If the beneficiary has other income, they must lodge a tax return that includes the income from the trust, and are entitled to a credit for the tax already paid by the trustee (ITAA36 ss 98 & 100).


(c) Deemed to be presently entitled under s 95A

Because the beneficiary is deemed to be presently entitled under ITAA36 s 95A and is a resident, the trustee is taxed at the beneficiary’s marginal tax rate (ITAA36 s 98(2)).

If the beneficiary has other income, they must lodge a tax return that includes the income from the trust, and they are entitled to a credit for the tax already paid by the trustee (ITAA36 ss 98 & 100).

(d) Presently entitled non-resident

Because the beneficiary is a presently entitled non-resident, the trustee is liable to pay tax (ITAA36 s 98(2A) & (3)).

The income is taxed as if it is income of an individual not subject to any deduction.

The taxable income is the beneficiary’s:

Share of the estate when they are a resident (ITAA36 s 98(2A)(c)).

Share of the income of the estate for a period they were a non-resident that was sourced in Australia (ITAA36 s 98(2A)(d)).

(e) No beneficiary presently entitled

Where there is no beneficiary presently entitled (ie because it does not fall within ss 97 & 98, and is not income that a non-resident in presently entitled to which is sourced outside of Australia), the trustee must pay tax on the income at the top marginal tax rate as if it were a resident (ITAA36 ss 99 & 99A).

The marginal tax rate (rather than the top marginal tax rate) will apply if section 99A (2) applies, which includes:

A trust that results from a will, codicil or intestacy (ITAA36 s 99A(2)(a)).

A trust that results from bankruptcy (ITAA36 s 99A(2)(b)&(c)).

The Commissioner exercising a discretion that it is unreasonable to apply s 99A.


2.4.Transfers of lossesTrust losses remain within the trust and cannot be distributed.

Trust losses can be carried forward to off-set future income of the trust (ss 265-8 & 272-140).

2.5.Anti-avoidance

(a) Passive distributions to minors

Div 6AA of Pt III ITAA 36 – ss 102AA to 102AJ.

Introduced in 1979 to discourage diverting income to children who would be on lower marginal tax rates.

Applies 45% tax rate to ‘unearned income’ of persons under 18 yrs of age unless an ‘excepted person’ or ‘eligible assessable income’ (eg: person engaged in full time occupation, employment income etc).

Trust income applies to beneficiary under 18 unless the amount is ‘excepted trust income’: s 102AG – eg: deceased estate.

(b) Trust stripping

Under ITAA36 s 100A, if

Beneficiary is presently entitled and not under a legal disability; and

Present entitlement of the beneficiary arose out a reimbursement agreement (ie profit making schemes designed to minimise tax)

The beneficiary is deemed never to have been presently entitled to the amount. Consequence is trustee is assessed under s 99A. At full marginal rate


3. Companies

3.1.General rulesA company is defined under s 995-1 as any body corporate or unincorporated association or body of persons that does not include a partnership. {this is wider than under the Corporations Act, and includes building societies and sporting clubs} {Cf Corporations law definition: A company is defined as an entity that is incorporated, or taken to be incorporated under the Corporations Law of Australia (CA s 9).}

As a separate legal entity, a company pays tax on its taxable income (ITAA97 s 4-1).

The company tax rate is 30%. There is no Medicare levy or tax-free threshold.

Income may be retained by the company.

3.2.ResidencyUnder ITAA36 s 6, a company is a resident if:

It is incorporated in Australia; or

Carries on business in Australia; and

Its central management and control is in Australia; or

Its voting power is controlled by shareholders who are residents of Australia.

(a) Incorporation

Here, the company [is OR is not] incorporated in Australia.

(b) Does the company carry on a business in Australia?

Whether a corporation carries on a business in Australia is a question of fact (Evans v FCT).

{Apply the test as you would for individuals}

Relevant factors:

System and organisation of record keeping

Scale of activities

Activities involve sustained, regular and frequent transactions

Profit motive

Commercial character of transactions.

Having a company’s central management and control within a country is indicative of carrying on activities in that country (Koitaki Para Rubber Estates; TR 2004/15).

(c) Central management and control in Australia

Whether a company has its central management and control in Australia is a question of fact (TR 2004/15). {this may be sufficient to show they are carrying on a business}

The shareholders at a general meeting who make decisions, can constitute the central management and control of the company (John Hood).


It is possible to have residency in 2 countries, however the courts will only make such a finding if the affairs of the company are divided between 2 countries (Koitaki).

Relevant considerations are:

Here, the meetings of directors occur ________ : Koitaki.

Here, the seal, minutes, register of members and books of account are kept _____________ : Koitaki.

Here, the decisions are made by _________ in _____________ : North Australia Pastoral Co Ltd.

Cases:

In Malayan Shipping Co Ltd v FCT, Sleigh was an Australian resident who held 2,498 of the 2,500 shares in the company, and had the power to appoint and remove directors, veto resolutions of the directors and affix the company seal to any instrument. Documents were prepared and executed by Sleigh, in London or Singapore. There, the court held that the central management and control was in Australia.

Koitaki Para Rubber Estates: A company that was incorporated in NSW, owned rubber plantations in PNG. The registered office was in Sydney, where all the registers & records were maintained. The directors resided and held meetings in Sydney. The affairs in PNG were conducted by an officer of the company. The court held that the central management and control were spread between PNG & Australia.

Esquire Nominees Ltd v FCT: The company was incorporated in Norfolk Idland. Its registered office, directors, A Class shareholders and meetings were all on Norfolk Island. The company’s solicitors in Australia managed its affairs and provided directions. The court held that the company did not have its central management and control in Australia.

(d) Majority of voting power

The voting power is controlled by residents of Australia if more than 50% of voting rights are controlled by Australian residents (Patcorp Investments {looks at legal, not beneficial owner}).


Tax evasion and tax planning{know difference between tax planning & what is not revision lecture.}

1. Tax planning v avoidanceTax planning describes the minimisation of tax payable through the structure of transactions and the mechanics of the tax law. You are not contravening any laws.

Tax evasion is comprised of non-disclosure or non-compliance, thereby breaking the law.

A sham is characterised as claiming that transactions exist that didn’t really occur. In the UK, there is a concept of a fiscal sham, which occurs where a transaction only occurs for tax purposes. However, this has not been adopted in Australia. In Australia, the concept covers situation where a parent company pays a subsidiary where no services were actually performed, so it is not limited to where no money was provided, but also to situations where there is no basis to claim a deduction.

2. Anti-avoidance provisionsThere are general anti-avoidance provisions in Part IVA of the ITAA36.

Specific anti-avoidance provisions are given priority over Part IVA. Specific anti-avoidance provisions include:

Section 82KK – this covers situations where you pay something to an associated entity to arbitrage tax over income years (ie for companies that pay in the income year after), so that you have a deduction in one year, but the income in the following year. The deduction is deferred to the year of income in these situations.

Section 45B – This covers an attempt to avoid being tax although you are paying a dividend out of retained earnings, by buying back shares. As such, certain share buy-backs will be treated as a dividend.

Part IVA is contravened where there is a scheme that results in a tax benefit, and a person involved in the scheme had a dominant purpose of producing a tax benefit, which is determined objectively (having regard to manner, form, substance, time, etc) (ITAA36 s 177D).

{note that the GST legislation is wider – rather than being dominant, the purpose need only be “not incidental”}

Hart’s Case

Interest deductibility

bank marketing a product – “Mortgage Tax Minimiser”

Effectively don’t pay interest on house, but only on your investment property (ie your personal home) effectively debt recycling

Lecturer thinks that there was an applicability of general deduction provisions, but jumped straight to IVA thought there was an issue as to whether the interest was actually linked to income producing activities

Was a scheme

Name shouldn’t really come into it because it is an objective test, not subjective but easily allowed the conclusion that there is a dominant purpose


If you just paid down the debt of the home very quickly (rather than effectively having the skyrocketing interest payments on the rental property), whether that would occur – where is the line?

“Wash sale” ruling – TR 2008/1

Summary of how Commissioner deals with Part IVA

crystallising loss on assets – claiming capital losses.

Do this by transferring them to partner.

Commissioner claims that there is a tax benefit once you trigger it and the purpose of the transaction is based in the minisation of tax

But why is it objectionable to get the tax benefit of a loss that has already occurred?

Variation on situation transfer to trust, and don’t transfer this back.

What was the dominant purpose of the scheme – it’s not just trying to crystalise the loss (and getting the shares back) – dominant purpose is really to transfer ownership.

3. Mitigating uncertaintyThe taxpayer may be able to obtain a Private ruling.

It is impractical to seek rulings on Part IVA because the Commissioner is cautious of giving such rulings, and if you are asking for a ruling, the ATO may be alerted to your activities and examine the transaction more than they otherwise would have.

Generally, as a lawyer, you will make arguments, but leave it up to the client to make a commercial assessment of whether to enter into the transaction.

4. Examples• Dividend access shares – company that don’t have rights except whatever dividends

the directors decide to pay to them.

• GST – delaying purchase so that not ‘new residential premises’ (5 year rule) GST applies to new residential houses. It can cease being your residential purposes, and you have rented out, and it becomes old residential premises after 5 years. What happens if you give options to each other after the GST doesn’t apply when you actually sell it. The only thing that happens is the passage of time – is that something that should be covered by Part IVA?

• CGT – delaying sale of asset until after 12 months, so 50% general CGT discount applies

• CGT – change of shareholdings from 40% to 39%, to be able to allow for access to ‘small business CGT concessions.
