Tax Law Notes

Tax Law Exam

L. 2 Jurisdiction To Tax

Basic Formula:
S4-10 -Tax Payable = (Taxable Income x Tax rate) - Tax Offsets
Taxable Year: 1 July – 30 June (note: s4-10 Note 1 – Commissioner may allow to adopt different period

Taxable Income
S4-15 – Taxable Income= Assessable Income – Deductions

Assessable Income
S6-1 – Assessable Income=
• Ordinary Income S6-5 AND
• Statutory Income s6-10 BUT NOT
• Exempt Income s6-15

Deductions
General Deductions -s8-1
Specific Deductions -s8-5

Basic Rules
Assessable Income includes: – s6-1
• For Aust. Residents = all ordinary and statutory income of Aust Resident taxpayer derived directly or indirectly from all sources, whether in or out of Australia, during income year s6-5(2) & s6-5(4)
• For Foreign Residents: = all ordinary and statutory income of Foreign Resident taxpayer derived directly or indirectly from all Australian sources, whether in or out of Australia, during income year s6-5(3) & s6-10(5)

Residence
S995-1 – Aust Resident is a person who is a resident for tax paying purposes

4 RESIDENCY TESTS: s6(1) ITAA 93:
1) Ordinary Resident Test
2) Domicile Test -
3) 183 Day Test
4) Superannuation Test
*Only need to satisfy one of these tests to be a resident → unless “temporary resident”

1. ORDINARY RESIDENCY TEST (common law)
TP is resident if resides in Australia:
• Dwell permanently or for considerable time in a particular place- Levene (tem. visits abroad)
• Question of fact, Lysaght (in UK for 1 week per month- ordinary course of life)
Joachim (family home in Aus and intention to treat Aus as home)
Factors in applying test ATO TR 98/17:
• Physical Presence in Australia
• Frequency, regularity and duration of visits
• Purpose of visits in Aus and abroad
• Maintenance of a place of abode in Aus
• Family, business and social ties
• Nationality

Levene v IRC (1928) AC 217
➢ Reside: To dwell permanently or for considerable time in a particular place.
➢ Levene was a UK resident often staying in hotels, but returning the UK 5 months a year for health, religious and family reasons.
➢ Concluded his purposes abroad were temporary in nature, and he was a resident until he took a lease on a flat in Monte Carlo.

IRC v Lysaght (1928) AC 234
➢ Moved from England to inherited estate in Ireland
➢ Sold home in England
➢ Non-Exec director of family company
➢ Travelled to England approx 1 week a month
➢ Held to be a resident in that his visits were not casual and in the ordinary course of life

Joachim v FCT (2002) 50 ATR 1072
➢ TP from Sri Lanka working as mariner of coast of Australia with his family remaining in a family residence in Aus
➢ Deemed resident given the lack of physical presence did not alter the intention to treat Australia as his home

2. DOMICILE TEST (s6(1)(a)(i))
Person is a resident of Australia if his domicile is in Australia unless the commissioner is satisfied that the TP has a permanent place of abode overseas. Individual will have Australian domicile only if it is demonstrated that he or she does not have a permanent place of abode overseas.
Domicile- Jurisdiction in which person first established legal ties
Two Categories of Domicile:
• Domicile of origin
• Domicile of Choice (migration) o Intention to Stay Indefinately – IT2650

Permanent Place of Abode Overseas:
Question of FACT
• Home or presence outside Australia – Applegate 1979 (left no assets in Aus)
• Can be Permanent which does not have to be for forever – Applegate
• Jenkins 1982 (attempted to sell house and close bank a/c→ permanent place of abode outside Aus)
Factors to be taken into account IT 2650
• Intended or actual stay in foreign country
• Duration and continuity of TP’s presence in Foreign County
• Establishment of home outside Australia (more than temporary)
• Residence or place of abode in Australia
• Durability of the association with Australia (maintenance of bank accounts, education of children, family ties, notifying govt departments)

FCT v Applegate (1979) 9 ATR 899
➢ Solicitor in Sydney sent to Vanuatu to open a branch
➢ Gave up lease on flat and left no assets in Aus and took wife
➢ Obtained lease and residency in Vanuatu
➢ Returned to Aus for medical treatment after becoming ill
➢ No time frame specified for length of stay in Vanuatu
➢ Permanent means something less than everlasting, but takes meaning from its context - contrasted with temporary
➢ Concluded TP was not a resident for the time spent in Vauatu

FCT v Jenkins (1982) 12 ATR 745
➢ Bank employee transferred for 3 year period to Vanuatu
➢ Non-resident for tax purposes

3. 183 DAY TEST (s6(1)(a)(ii))
TP will be treated as a resident if the TP has been in Aus for 183 days or more unless the commissioner is satisfied that: o The person’s usual place of abode is outside Australia and o The person does not intend to take up residence in Australia (ordinary residence test)

If test is satisfied→ treat as Aust TP for whole of income year – Executors of the Estate of Subrahanyam (2002)

183 days – continuously or intermittently
Test:
1. mathematical 183 days
2. Commissioner’s questions about abode – both must be satisfied

4. SUPERANNUATION TEST (s6(1)(a)(iii))
- Members of Commonwealth funds are deemed to be Aust residents

Temporary Residence
Sub 768-R – temporary resident who:
• Holds a temporary visa granted under Migration Act
• Not Australia Residents
Treated as FOREIGN RESIDENTS for tax purposes even though they satisfy residency tests→ only taxed in Australia on Australian sourced income.

DESIGNED TO PROVIDE TAX RELIEF FOR TEMPORARY RESIDENTS ON MOST FOREGN SOURCED INCOME AND CAPITAL GAINS → where a TP who is a resident of Australia for tax purposes but qualifies as a Temporary Resident → will not pay tax on his or her foreign income

EXAMPLE ANSWER FOR RESIDNCY

COMPANIES
S6(1) ITAA36 – that a company is a resident of Australia where it is incorporated in Australia, or not being incorporated in Australia, where it carries on business in Australia and has either its central management and control in Australia or its voting power controlled by shareholders who are residents in Australia.
3 Tests:
• Place of Incorporation
• Place of Central Management and Control
• Voting Contoll (Controlling shareholder’s in Aus?)

1. Place of Incorporation
- company that is incorporated in AUS is automatically a resident (corps act 2001)
- all other factors are irrelelvant

2. Central Management and Control 2 limbs: - company must carrying on business in Aus.
-central mgmt and control in aus *both must be satisfied
- only relevant for companies not incorporated in Aus.
-company must be carrying on business in Aus AND have central mgmt and control in aus to be an aus resident
-Question of Fact TR2004/15
- Malayan Shipping (company satisfies both limbs)
Malayan Shipping Co Ltd v FCT (1946) 71 CLR 156
➢ Both limbs of the test must be satisfied

3. Controlling Interest
2 Limbs: o Company is carrying on business in Aus o Voting Power is controlled by Australian Shareholders (50% of voting power at general meetings) Kolotex (1975). Limited to registered shareholders not beneficial owners (Patcorp- 1976)

SOURCE OF INCOME
“What a practical man would regard as a real source of income” – Nathan (1918)
Factors:
• Location of property used to generate income
• Place of performance or work
• Place of negotiation, execution and performance of contract
• Place of making/receipt of payments

General Rules for Source:
• Sale of Trading Stock = where business activates are carried out Kirk (1900)- where business activities took place. Murray (1929) - where no value is added by on jurisdiction, there will be no income allocated to that jurisdiction. Can be apportioned over different jurisdictions. Income from a contract is sourced where contract is made –Cliffs International, Murray
• Sale of Property (land) = source is where land is located =Rhodesia Metals, Thorpe Nominees
• Income from services = source is where services are performed, French, Efstathakis. Exception – where the contract or place of payment were performed = source, and not where the service was undertaken –Mitchtm (1965)
• Interest Income on loan = where loan contract made – Philips Gloe. – place of contract and funds transfer, Spotless – same.
• Dividends: source of profits from which the dividend is paid s44(1) ITAA1936……..if dividend flows through a chain of companies, source is the previous company in the chain Esquire Nominees
• Capital Gains – Australia sourced if “Tacxable Australian Property” s855-15.

DOUBLE TAXATION
Happens when:
• Concurrent (synchronised) exercise of taxing rights:
- Aust Resident taxed on world-wide income but foreign sourced income is likely to be taxed in overseas jurisdiction
- Vice Versa
• Dual Residents
• Income Sourced in 1+ country

Relief from Double Taxation:
• Tax Treaties (bilateral agreements)
• Aust Tax Law (exemptions, Foreign Tax Offsets)
S23AG- Exemption Provided where: o The individual has been engaged in foreign service fro at least 91 days continually AND o Income is not exempt from tax in the foreign jurisdiction
S23AH – foreign branch income and capital gains.

Foreign income tax offsets (FITO)

Introduced in July 2008

Provides taxpayers with a tax offset for any foreign income tax paid on amounts that are also assessable in Australia

Maximum offset available = $1000 OR
Difference between Australian tax payable on taxable income and Australian tax payable on taxable income excluding any foreign source income and related deductions

DOUBLE TAXATION
Taxation of Foreign Residents;
- have different PROGRESSIVE rate structures

L. 3 Income -Part 1

Basic Formula & Fundamentals:
S4-10 -Tax Payable = (Taxable Income x Tax rate) - Tax Offsets
Taxable Year: 1 July – 30 June (note: s4-10 Note 1 – Commissioner may allow to adopt different period

Taxable Income
S4-15 – Taxable Income= Assessable Income – Deductions

Assessable Income
S6-1 – Assessable Income=
• Ordinary Income S6-5 AND
• Statutory Income s6-10 BUT NOT
• Exempt Income s6-15

Deductions
General Deductions -s8-1
Specific Deductions -s8-5

Tax Offsets
Income Tax Credit (social security benefits, dividends –franking credits etc)
Listed in s13-1

ORDINARY INCOME
S6-5 (1) – income according to ordinary concepts.
S6-5(2)- if you are an Aus resident= income derived indirectly or directly from all sources
S6-5(3)- if foreign – sourced in aust
Scott (1935) – Ordinary Income= “Determined with the ordinary concepts and usages of mankind”

Features of ORDINARY INCOME:
• Sufficient nexus to an income earning activity
• Income from services, business or property

Capital Gains are not income: Eisner v Macomber (1920)
Scott v Commissioner of Taxation
The word “income” is not a term of art and what form of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind
= something that the common person would deem ordinary income

PREREQUISITES OF ORINARY INCOME:
• Must be CASH CONVERTIBLE: Tennant v Smith (1892 –free accom is not convert to cash), Cooke & Sherden (1980- free non transfer. holidays is not income)
• New or used car, transferrable holiday = cash convertible.
• If good can only be sold illegally It is not cash convertible Payne (1996)
• S21 (a) 1936 - business receipts are cash convertible- if the benefit is not convertible to cash, but is received as a result of carrying on a business, this section deems the benefit as if it was convertible to cash and thus will constitute ordinary income as long as it is at arms length as well s21A(2)
• S26(e) 1936 was introduced to ensure that applicable non cash benefits could be assessable as ordinary income. o Tennant v Smith o Given an apartment for work in UK, he was not allowed to sublet apartment therefore not regarded as income o S21A doesn’t apply o o FCT v Cooke and Sherden o Sold drinks door to door and got free holiday not cash convertible and non transferable from the company therefore not ordinary income.

• Must be a REALISED GAIN:
• Eisner v Macomber (1920)-
• Must be from an EXTERNAL SOURCE
• Tennant v Smith (1892) – must be from an external source
• Must be DERIVED BY TAXPAYER
• Countess of Bective
• S6-5(4) CONSTRUCTIVE RECEIPT RULE
• Taken to received the amt as soon as it is applied or dealt with in any way on your behalf or as you direct
• Federal Coke v FCT (1977) – B’s compensation pmt directed directly to Coke – court deemed that this amt was assessable for B
• Must not be a capital gain

CHARACTERISTICS OF ORDINARY INCOME o Generally REGULAR AND PERIODIC o Recurrent and Regular payments Blake (1984) o Not income when not periodic (once off lump sum)- Harris (1980) = capital o Note that the regularity of pmt is not always necessarily a deciding factor –ie Premier Ticket Issues (1933) – where a lump sum pmt was deemed as income. Generally lump sum pmts will be deemed on facts. Ie- interst pmt on loan = ordinary income or lump sum contract to do a job. Brent (1971-guy received lump sum) o FLOW FROM / NEXUS TO INCOME EARNING SOURCE: o Property: rent = income = nexus with property(source) o Business: - accounting firm’s profit= nexus to accounting firm o Personal Exertion – salary has a clear nexus with employee providing servies. o GAIN MUST BE SEVERABLE FROM INCOME SOURCE…. Ie- gain can be extract and not affect the underlying income source

Other Issues
• Illegality : doesn’t prevent it from being assessable Partridge v Mallandaine (1886)
• Compensation Payments : compensation takes on character of the loss being compensated- ie compensation for loss of income is ordinary income.
• Mutuality : income must be of gain to the tax payer. Ie- funds given to a club from its members and the refund of those funds back to the members are not assessable because there are no real gains Bohemians Club (1918)

STATUTORY INCOME

S6-10(2) – Amounts that are included in assessable income by specific provisions of the income tax legislation.
Examples
• Return to work pmts
• Bounties and subsidies
• Royalties
• Dividends s44(1)
• Allowances s15-2
• Net Capital Gains s102-5

Overlap b/w Ordinary Income and Statutory Income
S6-25(1) - Amount will only be included in assessable income once
S6-25(2)- usually stat income prevails
S15-2(3) – ordinary income will prevail over s15-2(3)(d)
S15-2 includes: the value to the taxpayer of any allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted in relation to employment or services rendered

EXEMPT INCOME

S6-20 – orindary or statutory income that is made exempt
3 main categories:
1. S11-5 - Entity is exempt
2. S11-10 – Income is exempt
3. S11-15- Income is exempt only if it is derived bt certain entities

Income from Services : TAXING THE WORKER → STAT INCOME

Salary & Wages
• Amount, which is product or incident or employment or a reward for services rendered, will be ordinary income Hayes (1965-) and Scott (1966-gift), where it was held that a receipt is not ordinary income if it is not a product oor reward for services
• Establishing that there is a sufficient nexus between the amount received and the work performed is an essential element to determine whether the receipt is ordinary income under s6-5

Non-Cash Benefits – s15-2 o Recall… amounts must be cash or cash convertible Tennant v Smith, Cooke v Sherden o S26(e)ITAA1936 NOW s15-2 – remedies the gap o S15-2 includes: the value to the taxpayer of any allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted in relation to employment or services rendered
S15-2 Issues:
- valuation
- associated not included
- THERFORE FBT regime introduced.

S15-2 Overlaps:
• S15-2 and FBT → FBT prevails and taxed in accordance with FBT note to s15-2
• Ordinary Income and s15-2 → Ordinary income will prevail s15-2(3)(d)

Receipt & Nexus to Employment
Salary and wages provide a sufficient link → ordinary income
Gift→ no nexus→ Not ordinary income

Does not matter if payment is made before, during or after completion of the task –Hochstrasser v Mayes (1960)
Irrelevant whether the benefit is provided by the entity for which the task was performed, or by an unrelated third party- still ordinary income Kelly vs FCT (1985)

ALLOWANCES
Predetermined Amount made to cover an estimated expense which is paid regardless of whether that expense is occurred RTA of NSW (1993) ATO TR 92/15.
(reimbursement) → compensation for exact amount of expense occurred.
Tax Treatment:
Allowance → Assessable as ordinary income under S15-2
Reimbursement → FBT

VOLUNTARY PAYMENTS & GIFTS
An gift may be income.
• Payment from a third party may be income where there is a “clearly recognised incident of employment” Dixon (1952), Kelly (1985), Holmes (1995)

Is it:
• Employment being the sole and motivating cause of the benefit OR
• Payment motivated solely by personal or other characteristics of the recipient

TIPS:
Assessable income → Penn v Spiers & Pond (1908), Greater Western Railway Co v Helps (1918), Calvert v Wainwright (1947)

Factors which may be relevant in distinguishing a mere “gift” from income:
- Whether the prize or gift is solicited- based on personal relationship and personal characteristics – Scott (1966- gift)- adequately paid, Hayes (1956)- gift=shares in old co given as a gift due to previous relationship and not a as a result of employment
- Whether the TP has been otherwise adequately renumerated for their services Scott
- Whether the prize or gift can be traced to some activity by the recipient for which the provider if grateful, Holmes (1995), Brown (2002)
- Whether the prize or gift is of a kind which is a common incident of the recipient’s occupation, Scott (1996) , Kelly (1995)
- Whether the prize or gift is available to anyone or a particular class of TP, Laidler v Perry (1965)- Christmans bonus paid to all employee regardless of rank= income
- Motive of the donor is a factor but not decisive factor Dixon (1952) , Harris (1980), Blake (1984)

COMPETITION PRIZES
Not income unless the TP carrying on a business OR prize is directly related to employment OR extensive personal exertion or skill. Kelly (1985- personal exertion- sportsperson’s prize = best & fairest, - prize is assessable as it is directly related to his skill and performance as a professiona footballer) Stone (2005) Babka v FCt (1989)- gambler was in the business of gambling.
Television show winnings – not income as element of chance > skill. Case 37 (1996) 12 CTBR NS; Ruling IT 167.

CAPITAL vs INCOME
Capital Receipts are not ordinary income
Capital Receipt- if TP has given up valuable right
Orinary Income Receipt- reward for services

• Provision of Knowledge – Brent (1971) – TP provided knowledge for a book, TP claimed she was being paid for giving up her capital rights to her story as she signed over rights to newspaper BUT → it was assessed as ORDINARY INCOME as there was no given up of property to which copyright could be assigned. Life story is not capital in nature.
• Compensation Payments – depends on what compensation is for…. If it for something capital in nature = capital receipt, if it is fore income- ordinary income. Bennett (1947)- payments were for loss of rights and not loss of income → capital payments
• Restrictive Convernant/ Restraint of Trade: depends on whether payment is in relation to current employment agreement or whether it is a separate agreement to give up valuable rights. Higgs v Oliver – not a result of normal employment thus not assessable – separate to contract. Payment made at the termination of a serice agreement that restricts activities of the TP are seen as CAPITAL → do not arise out of employment or show nexus to income earning activity SEE BOOK
• Sign on Fees- If it is normal and related to employment → ordinary income. Pickford (1998) – sign on fees = ordinary income.
Exception- Jarrod v Boustead- capital as payment for giving up the right to give up international rugby.

Common Employment Amounts:
SUPERANNUATION: not assessable when initially received, not a fringe benefit s136(1)(j), also tax free when employee withdraws from super account
FREQUENT FLYER POINTS:
Not assessable income – Payne, TR 1996/6 → not income as not convertible to CASH. Not assessable under s15-2 because not connected to employment (agreement between TP and airline)

Statutory Income from Services and Employment s15-2
• Covers gains from employment and services if they are not ordinary income or a fringe benefit.
• S15-2(3)(d)- if a gain is ordinary income it won’t be covered by s15-2
• Covers non cash, cash convertible and non cash convertible and has a wider nexus to employment
• S23L(1)ITAA1936 – if a gain is a FB, it will not be assessable under income tax

Has to fill TWO REQUIREMENTS for gain to be assessable under s15-2 :

1st Requirement:
• That there is an allowance, gratuity, compensation, benefit, bonus or premium – includes cash and non cash convertible
• Ie- an employee giving an employer a free television or giving the employee use of a car for personal purposes
• TP does not have to provide a service directly
• Royalties s15-20
• Dividends/ franking credits
• Net capital Gains s102-5 nb. Residual tax provision
• Allowance: o Predetermined amount given to a TP for a specific purpose where the taxpayer does not have to return any of the unspent amount

2nd Requirement:
• That the gain/benefit is “provided to the tax payer”
• Generally met
• Airline tickers- not met Payne

3rd Requirement:
• That what is received by the TP is “in respect of, or for or in relation, directly or indirectly to any employment of or sevices rendered by the taxpayer “ Smith v FCT 1987 – employee received pmt from Westpac for taking part in a degree – scheme was assessable under s15-2. Sufficient nexus b/w employment
• Payne v FCT- frequent flyer points not enough to show suffieient nexus

Examples:
• Reward of non cash convertible items for volunteer work
• Third party pmts for employment that are not cash convertible.
See Lecture for Return to Work PMTS etc.

L. 4 FBT
Different tax therefore is has different legislation.
• Introduced 19 Sept 1985
• Separate type of tax imposed on FB not income
• Tax is imposed on the EMPLOYER
• FRINGE BENEFITS TAX ASSESSMENT ACT
• FBT Year- 1 April to 31 March
• Employee is paid with non cash benefits instead of salary

9 STEPS IN DEALING WITH FBT:
1. Identify whether FB exists
2. Check whether it is excluded from the definition of a FB
3. Identify the category of BF that applies
4. Check whether an exemption applies
5. Determine the taxable value
6. Check if there is a reduction in taxable value
7. Determine whether the FB is a type 1 or type 2 benefit
8. Calculate the fringe benefits taxable amount
9. Calculate the FBT Liability

1. Is there a Fringe Benefit? S 136(1) FBTAA- FB definition
A FB exists when there is:
• A benefit o Wide definition s136(1) captures most things provided from employer to employee o Inc any right, privilege, service or facility ptovide under an arrangement of employment.
• Provided during the year of tax
• By an employer, associate or 3rd party o Doesn’t have to be directly from employee to be FB- has to be arranged by original employer. o Associates defined under s318ITAA and s159FBTAA o S148(4) ensures that FBs are supplied by an associate of the employeror by a 3rd party are none the less “provided”by the employer
• To an employee or associate o Benefit can be provided before employment o S148(2) person who is an associate of employee can receive benefit
• In respect of employment of the employee o S136(1) – in respect of employement. benefit must be provided “by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.” o J&G Knowles & Associates (2000) – not sufficient nexus because directors were owners of the business and received loans on this basis not because they were employees o Starrim (2000) - same as above- husband and wife were owners → no FB o S148(1) FBTAA – widens scope or in relation to employment. Lists number of situations where the FB is a FB regardless of circumstance. o Ruling MT 2019- shareholders who receive benefits → is NOT a FB.

2. Is it Excluded? S 136(1) specifically excludes certain items from FB
-Exclusions generally dealt with under income tax or exempt from income tax therefore should be excluded from FBT.
- Salary
- Super
- Benefits under employee share scheme
- Payments on termination of employment
- Allowances= salaries and wages→ not FBT
- Reimbursements are not excluded
- Goods supplied to employees and consumed on work premises: Div 11 (s 41)
- Use of property such as toilets, tea and coffee makingfacilities, childcare facilities on business premises: Div 12 (s 47)
- 1st $1,000 of in-house property fringe benefits (s 62)

3. Which Category? (13) 1. Private use of Car Div 2
- employer provides a car for private use: s7(1) FBTAA defines car. Travel between home and work constitutes private use as it iss not in the course of producing assessable income. FB exists as long as car is available for private use s7(1).
- It is exempt from FB when the car is only provided for work related purposes s8(2)
2. Debt Waiver Div 3
- Employer waives debt by employee s14 FBTAA
3. Free or low interest loans Div 4
- When an employer provides loan to employee s16.
- IR must be less than or equal to bench IR s17
- It is exempt if the loan is to purchase expenses incurred by the employee in relation to their employment s17(3)
4. Expense Payments Div 5
- employer pays for an expense incurred by employee s20
- Need to consider the allowance v reimbursement. Reimbursement → expense payment fringe benefit and are taxed under FBT.
- Exempt: s20A. Accommodation for work purposes.
5. Free or subsidised Housing Div 6
6. Living away form home allowance Div 7
7. Discounted fares on airline transport Div 8
8. Free of subsidised board Div 9
9. Meal Entertainment FB Div 9A
- Meal expenses can be booked under a number of categories
- Co can elect to apply Div 9A and all meal FB will be taxed under this this and not another ss37AA
- Employer provides employees with entertainment, food or drink
- Regardless of whether it is for business purposes or not
- If it is refreshment → NOT FB
- Social situation → is FB
10. Tax exempt body entertainment expenses Div 10
11. Car parking fringe benefits Div 10A
12. Property Fringe Benefits Div 11
- Employee provided with property s40
- Property under s136(1) is tangible and intangible. –Tangible= inc fish, animals, gas, electicity. Intangible= Real property, rights
- S41 FBTAA Exempt is property is provided to and consumed on a working day and on the business premises – ie- biscuits and fruit = exempt
13. Residual Benefits Div 12
- S45 FBTAA- catches all over FB. Ie- employer provides free services or at a discount.
- Exempt: s47- business operation facilties 0 ie bathrooms, recreational/childcare.

4. Is it Exempt? A) EXCLUDED UNDER SPECIFIC CATEGORY
-As listed above.
-ie. Div 11- s 41- excludes goods suppled to employees and comsumed on work premisis
Div 12 – s 47 – use of property such as toilets, tea coffeee making etc
S 62- 1st $1000 per employee of in house benefits incurred during ordinary course of its business

B) Listed in DIVISION 13 – “EXEMPT BENEFITS”
• Minor Benefits ( deductions s35-35
3. The Real Property used in the business is >$500k s35-40
4. Total value of other assets in the business >$100k s35-45

HAS THE BUSINESS COMMENCED

➢ Preliminary expenses are not generally within the scope of business
➢ Preliminary expenses occur before the entity has committed to commencing the business, not merely deciding whether to go ahead.

Ascertaining commencment=
• question of fact primarily based on the intention of the TP at relevant point in time
– Softwood Pulp & Paper 1976 –feasibility study not a commitment to commence a business.
-FCT v Osborne 1990- business had already commenced while land was being prepared for chestnut farming

Consequences of business commencement
➢ Incomes from normal proceeds of the business are ordinary income s 6-5
➢ Australian courts take a broad approach to nexus between normal business and income earning activities:
Memorex Pty Ltd v FCT (1987) 19 ATR 553
➢ magnitude of activity
➢ frequency of activity
➢ regularity of activity

Extraordinary and Isolated Transactions
ROFIT MAKING TRANSACTIONS OUTSIDE THE ORDINARY COURSE OF BUSINESS

BUSINESS→ determine whether receipts are the normal proceeds of the business

INCIDENTAL and RELEVANT TRANSACTIONS
• Has to be strong nexus to the identified business activity
• If approach if broad, then courts require a strong connection between the TP’s core business and the unusual activity to show a nexus if activity is unusual Memorex 1987.
• Memorex – business of leasing and selling computer eq. Some eq. leased was sold → potentially a capital inflow because it was not a major part of the business. Courts deemed that receipts from the sale of the leased equipment were part of the normal business ops and as such were not capital. → sufficient nexus with core business activities → sufficient magnitude, frequency and regularity to be judged normal TRANSACTION ORDINARY INCIDENT OF BUSINESS ACTIVITIES
NON CASH BUSINESS BENEFITS:
Under general principles, orindary income does not include receipts that are not cash or cash convertible → consequently business income will also not include these amounts. FCT v Cooke and Sherden.
S21A- applies only to non cash business benefits and not any other (property or personal) → deems non cash business receipts to be cash convertible and then prescribes a method of valuing the non cash benefit → constitute ordinary income.
S21A(1)- treats it as convertible to cash as long as it is income in nature
S21A(2)- requires the beneft to be brought to account at an arms length value

EXTRAORDINARY + ISOLATED TRANSACTIONS

• Gains made outside the usual course of business MYER o INCOME OR CAPITAL
• INCOME o FCT v WhitFords Beach 1982 - if an isolated transaction exhibits characteristics of a business, then profit will be considered ordinary income o Involves sufficient amount of effort , capital and planning o Only net profit will be ordinary income – Whitford.
• CAPITAL o “mere realisation” of a capital good made by enhancing its value → capital gain.

MYER’S 2 STRANDS:
If conditions of either strand are satisfied→ ordinary income
Myer 1987
Myer Emp provides loan to Myer Finace. Myer Emp sells right to interest to CitiCorp and receives lump sum. Ordinary Income? Proceeds were ordinary income. 1st strand: TP running business org, had profit making intetniton and profit was realised in original intetnio. 2nd strand: myer sold right to interst not actual loan.
2 Strands:
1st Strand:
• Needs to satisfy 3 requirements o There was a business operation or commercial transaction Myer o There was a profit making intention upon entering transaction Myer o The profit was made by means consistent with the oringinal intention- in the way profit was meant to be made Westfield (-sold land and didn’t develop shopping centre → doesn’t satisfy 1st strand)
2nd Strand
• Proceeds of the transaction will be orinary income if the TP sells the right to income from an asset without selling the underlying asset. Myer.

ISOLATED TRANSACTIONS
Mere realisation of an asset vs. carrying on a business.

Scottish Australian Mining 1950 – MERE REALISATION OF ASSET: TP not in the business of land sale, thus proceeds from sale of land were not orindary income. → perhaps wrongly decided given extensive development.

Whitfords Beach – CARRYING ON A BUSINESS: Sale of land generated ordinary income. Development and sale were so extenisce, it had characterists of a business → warranted ordinary income. NET PROFIT ONLY THOUGH .

INCOME FROM PROPERTY

Income derived by a TP for allowing another person to use the TP’s property.
DIAGRAM FROM PG 225
2 Characteristics:
• Return derived from the property not a return of the TP’s property
• Arises from the property itself and not from the TP’s labour and services

IF SO → ORINDARY INCOME
Includes :
• Interest
• Dividends
• Rent and Income s15-25
• Royalties
• Annuities

INTEREST
• Generally ordinary income under s6-5
• Income defined as payment for the use of money Riches v Westminster Bank 1947
• Compensation to the lender for an investment opportunity foregone, or the loss of use of money
• See book

RENT
• Generally ordinary income under s6-5
• Periodic payments made by a tenant for the use of premises or goods United Scientic Holdings
• If rent is received in lump sum it is irrelevant Case B51
• Generally ordinary income Adelaide Fruit and Produce Exchange Co

ROYALTIES
• Based on intellectual properties/ value of substance taken
• Payment made for the right to use property where the pmts cary according to the extent of excersise of the right McCaulet, Stanton.
• S15-20 deems royalties as statutory income
• Some are ordinary income o Exploit of intellectual property Stanton 1995

DIVIDENDS
• Included in TP’s assessable income under s44 1936
• Requirements: o Distribution must be a dividend o Paid to a shareholder o Out of profits derived by the company but note s44(1A)

L. 6 CGT

INTRODUCTION
• Part of income tax → CAPITAL GAINS ARE TAXED AS PART OF STAT INCOME.
• It income and none of the other stat income issues arise then CGT is used as a LAST RESORT
• Not a separate tax
• NET CAPITAL GAINS INCLUDED IN ASSESSABLE INCOME s102-5(1)
• Is a residual tax provision sec 118-20
• Australia sourced if “Tacxable Australian Property” s855-15. Therefore Australian residents are taxable on all CGT assets that are not TAXABLE AUSTRALIAN PROPERTY when the stop being a resident CGT EvENT I1

3 STEP APPROACH TO CGT:

1. Has the TP made a capital gain / loss
2. Calculate the gain or loss from the transaction
3. Calculate the net capital gain or loss for the year

1. HAS THE TP MADE A CAPITAL GAIN / LOSS
• Is there a CGT Event: o Capital gain/loss arises only if a CGT event happens s102-20 o S104-5 = LIST OF EVENTS (12 major categories) SEE BOOK IF YOU GET A QUESTION HERE
A1: Disposal of a CGT Asset s 104-10
➢ Occurs where there is a change of ownership because of some act or event or by operation of law.
➢ Occurs at the time the contract is entered

C1 & C2: End of a CGT Asset ss 104-20; 104-25
➢ C1 occurs where an asset is lost or destroyed
➢ C1 timing occurs when compensation is first received
➢ C2 occurs where an asset is redeemed or cancelled
➢ C2 timing is the contract that results in the end of asset

D1: Creating Contractual or Other Rights s 104-35
➢ creating a contractual or other legal right in another entity

I1: Stop Being an Australian Resident s 104-160
➢ May choose to disregard capital gain or loss until a CGT event occurs or the TP becomes an Australian resident again. o • Is there a CGT Asset o A CGT asset is defined as any kind of property or a legal or equitable right that is not property s108-5(1) o Specific Inclusions; s108-5(2) (land, shares/options, debts owed to you, a right to enforce a contractual obligation foreign currency) o Timing of acquisition:
• If it is acq before Sept 20 1985→ exempt from CGT
• Indexation/CGT discount applies if asset is held for 12+ months
• S109- when TP becomes an owner.
• Do any exceptions, special rules or exemptions apply? o Exceptions:
• Pre CGT ASSETS
• Assets acquired pre 20 Sept 2985 o SPECIAL RULES: Capital Gain/Loss is disregarded when:
• S104 – see book.
• Motor vehicles s118-5
• Collectables assets costing $500 or less s118-10 and losses can only be used to reduce capital gains from collectables
• Personal use assets costing $10,000 or less s118-10(3) whilst capital loss is always disregarded s108-20(1)
• Assets solely used to produce s118-12(1)
• Depreciating Asset: see book but generally disregarded s118-24(1)
• Trading Stock – s118-25
• Compensation - always disregarded s118-37(1)(a)
• Gambling and competition prizes s118-37(1)(c): o EXEMPTIONS
• Division 108
• Main residence s118-B SEE BOOK HERE o IS there roll over relief?
• Defer CGT to another time or person
• 2 Types
• Replacement : treat the replacement asset as if the original(same purchase date, price etc)
• Same asset rollover: transfer between tax payers (ie marriage breakdown) s126-A

2. CALCULATE GAIN OR LOSS
• Check specific Event- ie A1 to ensure what actually constitutes a GAIN / LOSS ie – s104-10(4) Suggests that for CGT event A1; you make a capital gain if the proceeds from the disposal are more than the assets cost base.
Process
1, Capital Proceeds:
• Capital proceeds are the sum of money you have received or are entitled to receive and any property you have received or are entitled to receive s116-20(1)
• GST is excluded from any GCT events s116-20(5)
• 6 Modifications to general rule in s116: o 1. Market Substitution Rule - s116-30 if the proceeds can’t be valued, or aren’t at arms length and amt received isn’t at market value, then the market value will be used. Market value = price purchaser would be willing to pay Spenser v Commonwealth 1907 o 2. Appointment Rule - If two different classes of CGT assets are sold for one price, they should be appointed separately s116-40 o 3. Non Receipt Rule - where TP does not receive part of the amount to which they were entitled to receive, ie a bad debt occurs for a sale of a CGT asset, the capital proceeds are reduced by the amt not received s116-45 o 4. Repayment rule – if TP has to repay some of the amt- the capital proceeds are reduced by the amt that has to be repaid. S116-50 o 5. Assumption of liability rule - EG- you sell $150k land, receive $50k and $100k is owed. The capital proceeds are $150k – amt assumed as a liability by other entity becomes a capital proceed – s116-55 o 6. Misappropriation Rule - capital proceeds will be reduced by the amout misappropriated s116-60

2. Cost Base
• Where TP is registered for GST- cost base will be net of any GST credits available. But where not registered → GST included in cost base.
• S110A sets out rules for determining the cost base of CGT asset
• 5 Elements under s110-25(1): o 1. Money paid by TP to acquire asset and the marker value of any other property given to acquire asset s110-25(2) o 2. Incidental Costs – (renumeration for surveyorm acuctioneer, accountant etc, cost of transfer, stamp duty, advertising , valuation costs, search fees, conveyancy kit, corowing expenses, cost incurred by head compant of consol group to) s110-35 o 3. Cost of Owning CGT Asset (only if asset acq after Aug 1991) inc interest borrowed to acq asset, cost of mainintaing, rates of land tax, interest, s110-25(4) o 4. Expend incurred to increase or preserve assets value s110-25(5) o 5. Exp incurred to establish, preserve or defend the title to the asset or a right over the assets s110-25(6)
• Costs that are not included / are exluded: o S110-45(1B) & (3)
• expenditure that is not for elements above
• expenditure that is excluded as a deduction under s26-54 (certain offences) or s26-5 (penalites)
• Expenditure that is a bride to a public official
• Exp that is providing entertainment
• Modification to General Rules of CB o Market Value Subsitution Rule - if TP did not incur any expenditure to acquire asset, if some exp cant be valued, or if it was not acquired at Arms Length → market value is to be used as cost base s112-20(1) where it is the case that it was acquired not at arms length→ market value will only be used if amt paid is higher than market value s112-20(2) WONT APPLY TO CGT EVENT D1 o Split, changed or merged assets – the change etc is not a new CGT asset. However, the cost base needs to be calculated for each CGT asset. → reasonable appointment of cost base and has to sum to the originial cost base s112-25 o Apportionment of expenditure- exp allocated to CGT asset is that which is reasonably attributeable to each element s112-30 o Assumption of liability rule - if TP acq asset from another TP and that trans results in a liability → the CB will include liability s112-30 o Put Options- provides that the first element of the CB of the right to dispose of a share in a company acquired as a result of CGT event D2 is the amt included in the TP’s assessable income as ordinary income as a result of the acq of the right plus any amount paid to acquire the right s112-37.
• INDEXED COST BASE o If asset was acquired before 21 Sept 1999 → may have indexed cost base → TP has choice of indexed CB or CGT discount o All elements may be indexed except 3rd elelment o Can only be indexed if asset was acquired 12 months before the CGT event o SEE STEP 3 FOR CALC o Cost = Index Number for quarter when asset sold / index number for ¼ when expense incurred
• Reduced Cost Base o Used to calc amount of capital loss o S110-55 ¬¬→ RCB has same elements as CB but no 3rd element. Also has NO INDEXATION. o If:
• CP < CB → calulate RCB
• And ……..CP>RCB → no capital gain/loss.

3. CALCULATE NET CAPITAL GAIN / LOSS FOR THE YEAR
• Reconciles all the different individual CGT gains/losses recognised in STEP 2 to determine net capital gain / loss
Steps followed:
1. S110-50 and 102-5→ require TP to calculate each gain/loss separately on all CGT events which occur during year
2. Decuct any losses from the gains
a. Is losses > gains = current year capital loss
b. Net Capital losses cannot be offset against TP’s other assessable income, but may be carried FWD indefinitely and offset against future capital gains s102-15
3. Deduct any losses from previous years
4. Reduce any remaining by discounting capital gains by the appropriate %
a. Discount Capital Gains s115-5
In certain situations the CB of a CGT asset may be indexed to take account inflation.
Can choose index or general discount if acq before sept 21 1999
Otherwise Individuals and trusts receive a 50% general disc on gains from certain CGT events, while super funds receive 30% disc.
There are some CGT events which don’t attract disc→ 12 month rule not satisfied or category D events
5. Add up remaing gains
6. The sum is the NET CAPITAL GAIN for the income year to be included in ASSESSABLE INCOME

Main Residence Exemption
Basic Rule s118-110 – any capital gain/loss is generally ignored if main dwelling. SEE BOOK HERE pg. 284.
Subdividion 118-B
Basic Rule: s118-110
Special Rules:
- Absense: s118-145
- Partial exemption rules:
Main residence for part of ownership period: s118-185
Use of main residence to produce assessable income: s118-190
Multiple residence → taxation determination 51:
If buy and sell properties too often then say it is a business and is ordinary income
Main residence = most time/famility, address use/personal belonging
Can be absense for 6 years from main residence and then if move in for a day, the 6 years restarts again → not cumulative. If you don’t rent it out doesn’t matter how long

Effect of Death Exemption
Cap gain/ loss arising because of death → disregarded s128-10
Beneficiary:
Pre CGT Asset; S128-15(4) – acauired on date of death for market value on that day
Post CGT Asset: s128-15(4) – acquired on date of death for the deceased persons cost base
Division 128
Capital gain/loss arising because of taxpayer’s death is disregarded: s128-10
CGT consquences for Beneficiary:
Pre CGT Asset = acquired on the date of death for market value on thet day: s128-15(4)
Post CGT Asset = acquired on the date of death for deceased person’s cost base: s128-15(4)
CGT asset = deceased person’s main residence
- Cost base = market value on day of death: s128-15(4)
- Exemption: s118-195

PRINT OUT GCT EXAMPLES FROM LECTURE (ON LMS)

L. 7 DEDUCTIONS

COPY TABLE FROM pg. 309 of BOOK.

2 Types:
• General Deductions s8-1
• Specific Deductions s8-5 o S8-10 provides that the expense should be deducted under the most “appropriate section” as a general rule the specific deduction provision should apply over general o S8-10- expense can only be deducted once

GENERAL DEDUCTIONS

General Deduction Rule

S8-1 :
A taxpayer can deduct from assessable income:
• A loss or outgoing (loss can include loss on a deal)
• Incurred during the year
To the extent that it is: POSITIVE LIMBS→ need to satisfy one
• Incurred in gaining or producing assessable income
• Necessarily incurred in carrying on a business for the purposes of gaining/producing assessable income
But not if it is: NEGATIVE LIMBS (s8-1(2)) → just need to satisfy one
• Capital or capital in nature
• Private or domestic
• Incurred in gaining/ producing exempt income
• Specifically denied by another provision of the act
COPY TABLE FROM pg. 311

POSITIVE LIMBS
To the extent that it is: POSITIVE LIMBS→ need to satisfy one
• Incurred in gaining or producing assessable income
• Necessarily incurred in carrying on a business for the purposes of gaining/producing assessable income

Nexus requirement:
Has to be a sufficient connection b/w the expense and the production of assessable incoe

Charles Moore & Co 1956 – employee robbed of paycheck on way to bank → loss did not has sufficient enough connection to employment
Day 2008 – Emploer tried to deduct legal exp incurred to protect himself from dismissal due to actual wrongdoing by taxpayer → not deductable
Herald Weekly Times 1932- Compensation paid by TP (co). → compensation incurred to continue seeling newspapaers → sufficient nexus. Compensation=unavoidable incident of publishing.
Magna Alloys 1980- legal expenses incurred in defending criminal charges → were deductable to ensure that the company could continues
La Rossa- proceeds from illegal business are assessable therefore corresponding deductions are deductable.
W Nevill 1937 – Expense to reduce future expenditure but is not directly realted to earning assessable income is not assessable (compensation pmts to redundant director)

Steele 1999- Expenses related to income gained or produed in future years- . Purchased property for future income and tried to claim interst→ deductable as there could be a sufficient nexus to earning income in the future.
Amalgamate Zinc 1935 - expenses related to assessable income in PRIOR YEARS – is not assessable. Can only be deductable if the income earned in prior years caused the expense to be incurred.

READ SUMMARY AT THE END OF pg 322

NEGATIVE LIMBS (s8-1(2)) → just need to satisfy one
• Capital or capital in nature s8-1(2)(a) o Incurred in income earning process = not capital o Incurred in income earning strucure = capital o Sun News Papers 1938 → Tests / factors to be considered
• 1. Character of Advantage Sought: need to consider if expense → enduring benefit for the TP
• 2. Manner in which benefit is to be used: long term or short term. Benefit received once and for all = capital. Recurrently rec benefit= revenue exp
• 3. Means adopted to obtain the benefit: TP acq benefit in once off pmt = capital.

Other General Principles o Vallambrosa Rubber Co 1910 – capital exp is foing to be spent once and for all o British Insulated & Helsby - expenditure gives rise to an enduring benefit may be capital but enduring does not mean for ever. o NAB 1965, Colonial Mutual Life 1953 : frequentcy of pmts.
• Private or domestic s8-1(2)(b) o Day to day living expenses : incurred regardless of generating income o Cooper 1991- Lvining exp vs earning assessable income. Professional rugby player who needed to eat more meat.TP sought deduction for food exp. Not deduct as food/rink is needed to sustain life.
• Incurred in gaining/ producing exempt income s8-1(2)(c)

• Specifically denied by another provision of the act
LISTOF DENIED DEDUCTIONS ARE LISTED BELOW
• Penalties (under aust or foreign law) s26-5
• Assistance to students/ HECS s26-20
• Gifts or donations s26-22
• Relative Travel Expenses – family mem etc s26-30
• Pamynets to realted entities s26-35
• Recreational Club Expenses s26-45
• Bribes to foreign public officersofficials s26-52/3
• Entertainment Expenses div 32-5
• Expenditure relating to illegal activities s26-54
• Reimbursed expenditure (ie TP is reimbursed for expend) s51AH 1936

QUANTUM

Apportionment – “to the extent that”
Loss or outgoing may be partially deduct where the TP has a dual purpose in relation to the expense Ronpibon Tin 1949

Actual Expenditure vs. reasonable expenditure. SEE BOOK

SUBSTANTIATION
TP must keep record of ecpenses
Must keep evidence and records for up to 5 years s900-165
Requirements under s900

COMMONGLY INCURRED EXPENSES

Common Non Deductable Expenses :
• Expenses incurred in gaining employment → not deduct Maddalena 1971
• Expenses in relocating as required by employer → not deduct Fullerton 1991
• Childcare expenses → not deduct Lodge 1982
• Travel Expenses o Travel between home and work;
• Not deduct Lunney, Hayley 1958
• When putting TP in a position to earn → not deduct o Travel outside normal work hours
• After hour calls Collins 1976 → deduct
• Itinerant Workers (travelling salesmen) Wiener 1978 → travel b/w work and home is deductable. Travel has to be substantial part of TP’s employment o Bulky items:
• Can deduct Vogt 1975 - ie instrument o Travel between Workplaces:
• If two places relate to same income producing activity – any exp incurred → deduct. S8-1
• Different income producing activities → not deduct Payne 2001.
• Self Education Expenses o Generally deductable under s8-1 if nexus requirement met but s82A 1936 – first $50 not deduct. o Cases where there needs to be a sufficient nexus: See pg, 358. Finn 1961, Hatchett 1971, Studdert 1971.
• Home Office Expenses o Generally not deduct as they constitute private or domestic outgoings. o Issue: Genuine use of home as office (necessity) vs. Convenience only
• Where a TP’s home office is genuine (part of home set aside for use in TP’s income earning activ only) a portion of both runnin and occupancy expenses incurred by the TP will be deduct under s8-1. 3 Conditions under TR93/30
• Area has to be clearly identifiable
• Area is not suitable for private use
• Exlusively used for carrying on business
• Area regularly used for visits from clients/customers
• Swinford 1984 - absense of an alternative place for conduct income earning activity may also be relevant in assessing whether it is genuine.
• SEE BOOK FOR HOME AS CONVENIENCE
• Clothing and Dry Cleaning Expenses o 3 Tests Used:
• Is clothing necessary and perculiar or TP’s employment Westcott 1997 ¬ employ could not deduct cost of buying black outfit for resturant- not perculiar enough.
• An abnormal cost to the TP Edwards (1994) – required nice frocks etc=abnormal=deduct
• Is the clothing required by the TP’s working conditions – Mansfield 1995 – air hostess = deduct for clothing, shoes, stocking etc. Morris 2002- sun protection = deduct.
• Legal Expenses o Capital or renevne exp: question of fact o Enduring and lasting benefit? o Hallstroms - legal exp in blobking competit product. → income earning structure→ capital → not deduct o READ TEXT BOOK – pg. 375

SPECIFIC DEDUCTIONS

• Where expense can be deducted under both General and Specific – should always go Specific as it is more apporoprite
• Mostly under s25, sometimes 30 and 36
• Section 12-5 lists specific deductions
COPY GRAPH FROM pg 383

Repairs:
• S15-10 expenditure relating to repairs on premisis or depreciating assets used for income producing purposes are immediately deductable unless calpital in nature – s25-10 o Repair is a question of the fact not legisl o Property needs to be used for income earning activities s25-10(2) o Cant’ be capital in nature s25-10(3)
• Repair= remedying of a defect in a property Lurcott v Wakely & Wheeler 1911
• 3 Categories of Expenditure on repairs which need to be emained:
1. Initial Repairs:
a. Those repairs that a TP makes to remedy defects existing at the time the asset was acquired → not deductable as it is probably capital in nature – W Thomas 1966
2. Improvements
a. Repair (not improvement) - involves restoring of a thing to a condition it formally had without changing its character W Thomas 1966 ]
b. If work surpasses this → most likely an improvement → most likely capital in nature → not deductable
c. An item must be in need of restoration if it is to be classified as a repair
3. Replacement
a. Replacement of part of an asset = repair → deductable
b. Replacement of entire asset → capital expense ¬¬ → not dedutable
c. Issue : when does the replacement of an asset mean that the asset has been effectively replaced? Lindsay 1960 - up to you to decide Big Fella.
4. Notional Repairs
a. Notional = estimated → not deductable. Notional- cost that would have been incurred had the TP just reapired the property and not improved it. Western Suburbs 1952 .

Gifts / Donations
Div 30- deduction available where gift/contribution Is to an eligible recipient:
Education, welfare, arts, science, environmental org, research.
Has to be a coluntary transfer of no material advantage by the giver McPhail. – received material adv and thus wasn’t deductable.
Can be money or property
S26-55 – TP is not entitled to a deduction if it results in TP incurring or increasing a tax losss for the year. Also check s78A(2) → no. of exceptions.

Bad Debts
• S25-35(1)(a) - TP provided with a deduction for the write off of the bad debt where the bad debt was previously included in the TP’s assessable income.
• Must have: o Existing debt o Debt is bad o Debt actually written off (need more than provision)
Tax Payer will not be entitled to a deduction for a bad debt under s25-35 unless all 3 requirements are met Point 1970.

Prior Year Tax Losses

• Tax Loss= Excess of deductions over assessable income s36-10(4)
• Can be carried fwd indefinitely and used to be offset against future income ss36-15, 360-17
• BUT if TP has exempt income, carry fwd losses must be used to offset exempt income before being used to offset assessable income that exceeds deductions ss36-15(3)36-17(3)
• If a tax payer has more than one previous tax loss, they should be deducted in the order in which they arose ss36-15(5) 36-17(7)
• If only part of the previous year tax loss is deducted in the current year, the remainder of that tax loss can be carried forward ss36-15(7) 36-17(9)
• NB : Special Rules for Companies o Must satisfy loss recoupment tests o Can choose how much of a loss to deduct if no exempt income s36-17(2)

Tax Related Expenses
S25-5 – can deduct exp incurred in managing tax affairs

Payments to Associations
S25-55 TP can claim deductions for payments for membership of a trade, business or professional association,- maximum amount = $42.

Travel Between Workplaces
S25-100- see book- kind of discussed in general.

CAPITAL EXPENSES
OPTIONS:
Deduct expenses over a number of years
• Depreciating assets
• Business related expenses s40-880

OR
-Add to cost base of the CGT Asset

CAPITAL ALLOWANCES
• Deductions that are not immediately deductable under the general deduction provision or a specific deduction provision because they are CAPITAL –MAY BE DEDUCTICBLE OVER A NUMBER OF YEARS UNDER THE CAPITAL ALLOWANCES REGIME>

Applies for depreciating assets s40-30(1) held for taxable purposes s40-25(7)
Deduction allowed for the decline in calue for an income year of a depreciating asset that you held during the year s40-25
• Decline in value → calculated using prime cost method s40-70 or diminishing value method. S40-75
• Broadly equal to cost s40-175 divided by effective life of asset
• Hold → legal/economic owner s40-40
• Adjustment on disposal – balancing adjustment- compare termination value and adjustable value
GO LOOK IN BOOK- SERIOUSLY DOUBT THIS WILL COME UP

L. 9 TAXATION OF COMPANIES

WHAT IS A COMPANY:
S995-1 Company:
• A body corporate or,
• Any other unincorporated association or body of persons but does not include a partnership
• S103A(2) - public company broadly means listed company.
• S103A(3) – not public

TAXATION OF COMPANIES
• A company is a taxpayer s9-1
• Calculates assessable income under the general rules (assessable income and deductions)
• No tax free threshold or discounting of capital gains

LOSS RECOUPMENT
• Companies are entitled to carry-forward revenue lossess s36-15
• To do so”
S165-10 – revenue Losses S165-96 – Capital losses → have to satisfy either: o Continuity of ownership test s165-12 OR o Same business test “ s165-13

Continuity of Ownership Test s 165-12
Requires that during the ownership test period, >50% of:
➢ Voting power in the company AND
➢ Rights to dividends in the company AND
➢ Rights to capital distributions are beneficially held by the same persons
➢ Ownership test period is the time of the loss until the time of recoupment
➢ Same share same owner rule: s 165-165

Same Business Test s 165-13
➢ Requires that where a company has been taken over, it must be carrying on business at that time and it must after the takeover carry on the same business which means identical business
➢ Avondale Motors (Parts) Pty Ltd v FCT (1971) 124 CLR 97 sets the precedence for identical business
➢ The SBT period starts at the point in time at which the COT test is failed => the business can change before this point in time \

Tax Consolidation
➢ A corporate group may elect to consolidate and will then in general be treated as a single entity for tax purposes
➢ Election is made by the head company and applies to all wholly owned subsidiaries: s 703-10
➢ Once the election is made it is irrevocable: s 703-50
➢ Wholly owned subsidiary is head company owns all membership interests: s 703-30
➢ Head company must be an Australian resident: 713-130
➢ Head company lodges tax return and is liable for group's tax liability but if head company defaults, each sub is liable for group's tax

Consequences of Consolidation
➢ Intra-group transactions are ignored for tax purposes (e.g. transfer of assets have not CGT consequences)
➢ Losses, franking credits and foreign tax credits pooled with the head company
➢ Complex integrity measures do not apply to intra-group transactions
➢ Reduced ongoing compliance costs

Dividends
➢ s 6(1) ITAA 36 a shareholder includes a member or stockholder

Imputation System
➢ A franking account is an account recording the amount of tax paid by the company
➢ Imputation system is a system of tax offsets
➢ The offsets reduce tax payable, not taxable income (more valuable than a deduction)
➢ Depending how much tax has been paid on profits, dividends may be party franked
➢ Entities receiving a dividend must add a franking credit component to their assessable income: s 207-20 ITAA 97
➢ The grossed-up amount is the tax offset on the distribution calculated under s 202-60
➢ The company provides SH with a distribution statement: s 202-75(1)
➢ Franking credits recorded by the company in debit and credit accounts

Integrity Rules
Maximum Franking Credit Rule
➢ Maximum amount of income tax that an entity making a distribution could have paid on the underlying profits, at the current corporate rate: s 202-55
➢ Amount of frankable distribution x [corp tax rate/(100% - corp tax rate)]

Benchmark Franking Rule
➢ All distributions within a particular period must be franked to the same extent: s 203-25
➢ Franking percentage calculated as: franking credit allocated to the frankable distribution maxiumum franking credit for the distribution

➢ Benchmark franking percentage is the percentage to which the first frankable distribution for the period was franked: s 203-30
➢ Franking % > Benchmark % => over-franking tax: s 203-50(1)(a)
➢ Franking % < Benchmark % => debit to comp's franking acct: s 203-50(1)(b)

Anti-Streaming Rules
➢ Dividends to be distributed to all SH equally

Calculating Tax Payable
➢ Amount of frankable distribution included in assessable income: s 44 ITAA 36
➢ Amount of franking credits attached to distribution also included in assessable income: s 207-20(1) ITAA 97
➢ Amount of franking credits claimed as a tax offset for income year: s 207-20(2) ITAA 97
➢ Shareholder entitled to refund if tax offset is greater than tax payable for the income year: s 67-25 ITAA 97

L. 9 GST

A New Tax System (Goods and Services Tax) Act 1999 (Cth) COPY TABLE FROM Pg 719
Registration
➢ Must be carrying on an enterprise in order to register for GST purposes: s 23-10 GST Act
➢ Certain entities must register when their annual turnover exceeds the registration turnover threshold: s 23-5
➢ From 1 July 2007 the threshold is $150,000 for non-profit organisations and $75,000 for all other entities: s 23-15
➢ Meaning of annual turnover outlined in Div 188
➢ Value of all its supplies during the relevant 12-month period related to its enterprise, excluding any input taxed supplies and supplies not made for consideration: s 188-15
➢ Relevant 12 months period includes the current period (the preceding 12 months) and projected annual turnover (the next 12 months)
➢ Generally GST exclusive sales arising from enterprise
➢ Registration may cause greater compliance costs and impose greater costs on customers of the firm (through GST)
➢ Entities below the threshold may still choose to register if they are an enterprise

Enterprise
Defined in s 9-20 GST Act and includes an activity or series of activities conducted:
➢ in the form of a business
➢ in the form of an adventure or concern in the nature of trade
➢ in the form of leasing, licensing or other grant of an interest in property on a regular or continuous basis

➢ Therefore determining whether an entity is a business or carrying out an isolated transaction is relevant in determining whether an entity can register for GST purposes
➢ Certain activities specifically excluded such as provision of labour as employee or private recreational hobbies

Taxable Supply
An entity makes a taxable supply under s 9-5 of GST Act if:
➢ it makes a supply
➢ the supply is for consideration
➢ the supply is made in the course of furtherance of the entities enterprise
➢ the supply is connected with Australia
➢ the entity is registered or required to be registered for GST

➢ Taxable supplies create the obligation to pay (an therefore charge) GST
➢ Tax-free supplies or input taxed supplies are not taxable supplies

Supply s 9-10 defines supply as 'any form of supply whatsoever' and specifically includes the following
➢ a supply of goods
➢ a supply of services
➢ a 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 or to tolerate an act or situation

FCT v Reliance Carpet Co Pty Ltd (2008) 68 ATR 158
➢ Deposit was made on property, and the buyer defaulted
➢ Commissioner assessed the TP for GST under s 99-10 which establishes time of recognition for forfeited supply
➢ TP argued deposit was not taxable as there was no supply
➢ Court deemed contractual right to property a supply to the buyer and therefore the forfeited deposit was still taxable

Consideration
➢ Defined in s 9-15 of GST Act as including any payment or any act or forbearance in connection with the supply
➢ As such, consideration is not limited to the provision of money, but includes anything of value, such as the provision of services
➢ Does not have to be voluntary: s 9-15(2A)
➢ Des not need to be provided by the recipient of the supply: s 9-15(2)

Australia s 9-25 details that a supply is connected with Australia where:
➢ the goods are delivered or made available to the recipient in Aus
➢ the supply involves goods being removed from Aus
➢ the supply is of Australian land
➢ the supply is done in Aus
➢ the supply is made through an enterprise carried on in Aus

Consequences of Making a Taxable Supply
➢ An entity that makes a taxable supply is liable to pay GST on the taxable supply: s 9-40
➢ The amount of GST payable on taxable supply is 10% of the value: s 9-70
➢ The value of the supply is equal to 10/11 of the price: s 9-75

GST-free Supply
➢ Items listed in Div 38 as 'GST-free supplies" are exempt from being a taxable supply
➢ Generally relates to goods and services which are considered essential living expenses, necessary to maintain the international competitiveness of Aus businesses or charitable activates
➢ Some specific listed items are explained below
➢ See p 615 for full list
➢ Exports GST-free under subdiv 38-E

Food
➢ s 38-2 stipulates that a supply of food is GST free
➢ Food defined in s 38-4 as food and beverages for human consumption, ingredients for food and beverages for human consumption, goods to be mixed with or added to food for human consumption, and fats and oils marketed for culinary purposes
➢ Does not include live animals, unprocessed cow's milk, grain, cereal or sugar cane that has not been subject to any process or treatment or plants under cultivation that can be consumed as food for human consumption without being subject to further process or treatment
➢ s 38-2 specifies food is not GST-free where it is for consumption on the premises from which it is supplies (restaurant food), hot food for consumption away from those premises and food and beverages specified in Schs 1 and 2 of the GST Act as not being GST-free
➢ Broad rule of thumb is that only fresh, unprocessed food will be GST-free
➢ s 38-6: the packaging of food is also GST-free if the food itself is GST-free

Health
➢ Under s 38-7 the supply of medical service is GST-free
➢ s 195-1 defines medical service as a service for which a medicare benefit is payable or any other service supplied by or on behalf of a medical practitioner or approved pathology practitioner that is generally accepted in the medical profession as being necessary for the appropriate treatment of the recipient of the supply
➢ Certain services such as those provided for cosmetic reasons are not GST-free: s 38-7(2)
➢ Goods provided are also GST-free if the medical service was GST-free: s 38-7(3)

Education
➢ s 38-85 states the supply of an education course and any administrative services directly related to the supply of such a course which are provided by the supplier of the course are GST-free
➢ s 195-1 defines education course as being a pre-school course, a primary course, a secondary course, a tertiary course, a Masters or Doctoral course, a special education course, an adult and community education course, a professional or trade course or a tertiary residential college course
➢ Excursions or field trips (s 38-90), course materials (s 38-95), and leases of curriculum-related goods (s 38-97) may also be GST-free where they relate to an educations course

Consequence of Making a GST-free Supply
➢ An entity that supplies GST-free supplies is not required to pay GST on the making of the supply: s 38-1
➢ Still entitled to input tax credits on acquisition

Input Taxed Supply
➢ Another category of goods and services exempt from being taxable supplies
➢ Listed in Div 40
➢ Financial supplies (subdiv 40-A), residential rent (subdiv 40-B), residential premises (subdiv 40-C), precious metals (subdiv 40-D), school tuckshops and canteens (subdiv 40-E), fund-raising events conducted by charitable institutions (subdiv 40-F)

Consequences of Making an Input Taxed Supply
➢ Not required to pay GST on the making of the supply: s 40-1
➢ Entity is not entitled to a refund of GST paid on any acquisitions related to the making of that supply as the acquisition would not satisfy the requirements of creditable acquisition

Creditable Acquisition
➢ Governs an entity's entitlement to input tax credits (refund of GST paid on acquisitions)

Under s 11-5 an entity makes a creditable acquisition if
➢ the entity makes an acquisition
➢ the acquisition was solely or partly for a creditable purpose
➢ the supply to the entity was a taxable supply
➢ the entity provided or was liable to provide consideration for the supply
➢ the entity is registered or required to be registered for GST purposes

Acquisition
➢ Defined very broadly in s 11-10 as 'any form of acquisition whatsoever' includes: ➢ an acquisition of goods
➢ an acquisition of 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 or something the supply of which is 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

Creditable Purpose
➢ Generally the key issue in satisfying requirements of 'creditable acquisition'
➢ Defined in s 11-15
➢ Creditable purpose where the acquisition relates to the carrying on of the entity's enterprise (business purpose)
➢ s 11-15(2)(b) states acquisitions which are domestic or private in nature are no for a creditable purpose
➢ Acquisitions relating to fringe benefits that are then for private use are creditable purpose: GST ruling 2001/3
➢ s 11-15(2)(a) states an acquisition is not for a creditable purpose where it relates to the making of input taxed supplies
➢ Solely or partly means it will still be treated as creditable if there was a non-business purpose but part of it was a business purpose too

Consequences of Making a Creditable Acquisition
➢ An entity that makes a creditable acquisition is entitled to input tax credits on the acquisition: s 11-1
➢ The amount of input tax credits on a creditable acquisition is the amount equal to the GST payable on the supply of the thing acquired: s 11-25
➢ Where the acquisition was only partly for a creditable purpose, the amount of input tax credits is limited to the extent that it was for a creditable purpose: s 11-30

Special Rules
Non-Deductible Expenses
Even where all of the elements of a creditable acquisition are satisfied, an acquisition will not be a creditable acquisition if it is a non-deductible expense, and for GST purposes s 69-5 includes the following non-deductible expenses:
➢ penalties: s 26-5 ITAA97
➢ relatives travel expenses: s 26-30 ITAA97
➢ family maintenance expenses: s 26-40 ITAA97
➢ recreational club expenses: s 26-45 ITAA97
➢ expenses for a leisure facility or boat: s 26-50 ITAA97
➢ entertainment expenses: Div 32 ITAA97
➢ non-compulsory uniforms: Div 34 ITAA97
➢ agreements for the provision of non-deductible non-cash business benefits: s 51AK ITAA36

Importation
➢ Rules contained in Div 13
➢ Apply regardless of whether the entity is registered
➢ Only applies to the importation of goods and not other types of importations
➢ Impose the liability to pay GST on the importer of goods, not the supplier
Taxable Importation
Under s 13-5 an entity makes a taxable importation where:
➢ goods are imported; and
➢ the goods are entered for home consumption

➢ Essentially this means the goods must be imported for consumption in Aus, not just in transit
➢ Entity does not need to be carrying on an enterprise or registered

ss 13-5 and 13-10 state a limited number of goods which are non-taxable importations:
➢ goods that would have been GST-free or input taxed supplies if they were supplies
➢ money
➢ goods exported from Aus and returned to Aus unchanged
➢ goods that are duty free under the customs law (included goods with customs value less than $1000)

➢ GST is payable by the person making the taxable importation: ss13-1 and 13-15
➢ Amount payable is 10% of the value of the taxable importation: s 13-20(1)
➢ Value of taxable importation is value of goods plus any costs incurred in transporting and insuring the goods to bring into Aus: s 13-20(2)

Creditable Importation
Under s 15-5, a creditable importation exists where:
➢ an entity imports goods solely or party for a creditable purpose
➢ the importation is a taxable importation
➢ the entity is registered or required to be registered for GST purposes

If this is the case, the entity will be entitled to input tax credits: ss 15-1 and 15-15

Adjustments
➢ An entity can make an adjustment to its GST obligations on supplies or acquisitions under Div 19
➢ May occur because acquisition or supply has been cancelled, consideration has changed, stops being a taxable supply or creditable acquisition: s 19-10
➢ Entity must increase or decrease its GST liability on its BAS
➢ Attributable to the tax period where the entity becomes aware of the adjustment: s 29-20(1) unless on a cash basis in which case when received: s 29-20(2)
➢ Must make an adjustment note set out in s 29-75

Interaction with Other Taxes
Income Tax
➢ Entities include GST-exclusive amounts of their supplies in their assessable income: s 17-5 ITAA97
➢ Where an entity is entitled to input tax credits, a deduction will be the GST-exclusive amount: s 27-5
➢ If entity is not entitled to input tax credits, a deduction will be the GST-inclusive amount

FBT
➢ FBT liability depends on the entity's entitlement to input tax credits
➢ Determines whether it is a type 1 or type 2 benefit