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LA4023 – Taxation Law
Week 1......................................................................................................................................................3What is Tax?......................................................................................................................................................3
Commonwealth Constitution...........................................................................................................................3Tax Definition.................................................................................................................................................3Uniform Tax Scheme......................................................................................................................................3Tax Simplification Project...............................................................................................................................4
Australian Tax System......................................................................................................................................4Who do we tax?...............................................................................................................................................4What do we tax?..............................................................................................................................................7Tax Rates.........................................................................................................................................................7
Week 2......................................................................................................................................................9Income – General Principles.............................................................................................................................9
Income tax formula (s 4-10(3)).......................................................................................................................9Exempt Income..............................................................................................................................................10Non-Assessable Non-Exempt Income...........................................................................................................10Assessable Income........................................................................................................................................10Ordinary Income............................................................................................................................................11
Week 3....................................................................................................................................................14Income from Personal Exertion, Property, Business, & Trading Stocks...................................................14
Income from Personal Exertion.....................................................................................................................14Income from Property...................................................................................................................................17Income from Business...................................................................................................................................19Treating Trading Stock..................................................................................................................................23
Week 4....................................................................................................................................................24Deductions........................................................................................................................................................24
Section 8-1: General deductions....................................................................................................................24S 8-1(1): The Two Positive Limbs................................................................................................................24S 8-2: The Four Negative Limbs...................................................................................................................26
Week 5....................................................................................................................................................31Specific Outright Deductions..........................................................................................................................31
Repairs – s 25-10...........................................................................................................................................31Bad Debts – s 25-35......................................................................................................................................32Carry Forward Losses – Div 36....................................................................................................................33Gifts – Div 30................................................................................................................................................33
Deductions Over Time.....................................................................................................................................33Prepayments..................................................................................................................................................33Borrowing Expenses – s 25-25......................................................................................................................33Depreciation/Uniform Capital Allowance System – Div 40.........................................................................34
Week 6....................................................................................................................................................35Substantiation..................................................................................................................................................35
Who must substantiate?.................................................................................................................................35What records are required?............................................................................................................................35What expenses must be substantiated? S 900-10..........................................................................................35Tax Accounting.............................................................................................................................................37
Week 7....................................................................................................................................................40Capital Gains Tax............................................................................................................................................40
CGT Assets....................................................................................................................................................41
CGT Events...................................................................................................................................................42Capital Gains/Losses.....................................................................................................................................44Indexation and Discounting...........................................................................................................................44Net Capital Gains/Losses..............................................................................................................................46
Week 8....................................................................................................................................................48Superannuation................................................................................................................................................48
Superannuation Regulatory Scheme.............................................................................................................48Taxing Point 1 – When Contributions Are Made..........................................................................................48Taxing Point 2 – Taxation of Super Entities.................................................................................................50Taxing Point 3 – When the Benefit is Paid...................................................................................................50Superannuation Contribution Flow Chart.....................................................................................................53
Termination Payments....................................................................................................................................54Fringe Benefits.................................................................................................................................................55
Taxing Fringe Benefits..................................................................................................................................55Fringe Benefits Taxable Amount..................................................................................................................56
Week 9....................................................................................................................................................59Partnerships.....................................................................................................................................................59
What is a Partnership?...................................................................................................................................59How Partnership Income is Taxed................................................................................................................60Dissolution of Partnerships...........................................................................................................................62
Week 10..................................................................................................................................................63Taxation of Trusts............................................................................................................................................63
What is a Trust?.............................................................................................................................................63Outline of Taxation of a Trust.......................................................................................................................63Anti Tax Avoidance Measures......................................................................................................................68Taxation of a Trust Flow Chart.....................................................................................................................69
Week 11..................................................................................................................................................70Taxation of Companies....................................................................................................................................70
Imputation.....................................................................................................................................................73Benchmark Rule............................................................................................................................................74Franking Deficit Tax.....................................................................................................................................75Companies as Shareholders...........................................................................................................................75
Week 12..................................................................................................................................................76Primary Producers..........................................................................................................................................76
Deferral of Income........................................................................................................................................77Averaging Income Div 392...........................................................................................................................77The Comparison Rate....................................................................................................................................79The Averaging Component s 392-90............................................................................................................80The Averaging Adjustment...........................................................................................................................80Farm Management Deposits..........................................................................................................................80
Week 13..................................................................................................................................................82Tax Collection..................................................................................................................................................82
Commissioner’s Power to Retain Information..............................................................................................82Domestic Collection of Tax..........................................................................................................................83
Tax Evasion, Planning, and Avoidance.........................................................................................................85
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Week 1
Week 1
What is Tax?
Commonwealth Constitution S 90 – Cth has exclusive powers to impose customs and excise duties
o States and territories are thought to be constrained by this section – definition of excise broad
S 51o Concurrent powero Cth has power to make law in respect of taxation; but so as not to discriminate between
States or parts of States S 109 – Where State and Cth law is inconsistent, Cth law will prevail
o There will be no inconsistency in tax – both taxes must be paid S 81 – Consolidated Revenue Fund (CRF)
o Where tax is collected, it will enter this fundo Once the money enters this fund, the government must pass an Act to take the money
out for spending S 83
o Whether money enters this fund will not determine whether there is a tax
Tax Definition The compulsory extraction of money for public purposes enforceable by law and not a payment
for services rendered Characterisation
o When deciding whether or not it is a tax, the characteristics of the legislation will be considered
o Substance over form Luton v Lessels
Uniform Tax Scheme Only Cth may impose an income tax? Rating Act – set Federal Income Tax rates so high people could not pay both Federal and State
taxes. Assessment Act – giving the Federal Government priority in payment (enforceable under s 109
of the Constitution). Grants Act – reimbursing the states for lost revenue provided they did not raise their own taxes. Arrangements Act – empowering the Federal Government to take over the premises, staff and
records of the various State Tax Offices.
Limits on Federal Legislative Power (from the Constitution) S 51
o The law must be one with respect to taxationo The law must not discriminate between States or parts of States
S 114o The Federal Government may not tax State property
S 55o The law must deal with one subject of tax only
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Week 1
o Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect.
o Laws imposing taxation, except laws imposing duties of customs or of excise, shall deal with one subject of taxation only.
This is due to s 53 – Bills originating from tax can come only from the House of Reps, the Senate can only accept or reject
State Industries v Commonwealth
Taxing Statutes The Assessment Acts Other – these are separate for fear of breach of s 55 of the Constitution
o Ratings Actso Taxation Administration Acto International Tax Agreement
Tax Simplification Project A project designed to rewrite the 1936 Assessment Act, without changing any policies, with the
purpose of making the act more accessible and easier to understand Both Acts are in force (though they have not finished the rewrite) Resulted in two Assessment Acts
o ITAA 1936o ITAA 1997
Where there is a dash, the section will refer to the 1997 Act
Australian Tax System
Who do we tax? Must be a jurisdiction to impose tax on that entity This will apply to those with a sufficient association with Australia through:
o Residenceo Source of income
Residents will be taxed on world-wide income S 6-5(2) – Ordinary income
Non-residents will only be taxed on Australian sourced income S 6-5(3)
o 6-10(4) – resident, statutory incomeo 6-10(5) – non-resident, including statutory income
Who is a resident?o S 6(1) ITAA 1936
(a) A person, other than a company, who resides in Australia and includes a person:(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or(iii) who is:
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Week 1
(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or(B) an eligible employee for the purposes of the Superannuation Act 1976; or(C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B).
o Tests – individuals Common Law test
Done on a year to year basis ‘Domicile’ test 183-day rule Superannuation test
Common Law testo Generally used for people entering into Australiao The person must reside in Australia, but residing is not defined in the Act
Tax ruling 98-17 Case law
Has adopted the meaning of where the person dwells permanently or for a considerable time, or where they have settled or it is their usual abode
Master tax guide has many cases – looks at everything across the year Court weighs up:
o Continuityo Routineo Habit of livingo Habit of residingo Physical presence in Australiao How often are visitso Duration of visitso Purpose of visitso Relations in Australiao Note: Nationality is not a significant factor
Federal Commissioner of Australiao Work ties outweigh family ties
o Under this test, residency starts at the date of first arrivalo From that date onwards, world-wide source
Domicile testo A person is a resident of Australia if:o Their domicile is in Australia
Unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.
o Domicile is a legal concept according to the Domicile Act 1982 (Cth) and common law rules.
o Categories of Domicile Domicile of Origin Domicile of Choice Domicile of Dependency
o Applegate Was transferred indefinitely to Vanuatu He gave up his Australian flat and rented in Vanuatu Always intended to return to Australia
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Week 1
He claimed he was a non-resident for the period he was away he should not need to pay income tax
The court said he was a non-resident under the common law test Under the domicile test, he was also found to be a non-resident
o Jenkin Transferred to Vanuatu for three years Returned early due to ill health Court said he was not required to pay income tax for that time under the
Applegate testo IT 2650
Look to the intended and actual stay in the foreign country, and whether that period is substantial
Two years or more is considered substantial Looks to whether they establish a home outside of Australia that is more than
temporary Look to enduring relationship with Australia
183 day ruleo To escape this, must establish that there usual place of abode is outside Australia, and
there is no intention to stay in Australia permanentlyo It is uncertain when a person is actually an Australian resident
For the whole year Case 19 – From the 184th day Groves – Only an Australian resident for the days actually present
Source Source is determined by
o Particular statutory ruleso Common law source rules
Common lawo Nathan v FCT (1918) 25 CLR 183
The ‘source’ of particular income is a ‘practical hard matter of fact’ o ‘Source’ is determined by looking at what a practical person would regard as the ‘real’
source of that income.o SCBT French
Normally where the service is performed is where it’s sourcedo SCBT Mitchum
French is not the only rule – it will not determine where it is sourced All factors must be considered
Common law source ruleso Spotless Services
If they put their money in an Australian bank it would have earned more interest, but they put it in the Cook Islands, who withheld 5%
This meant that they did not have to pay income tax in Australia However, they breached the anti-avoidance rule
Dividend Incomeo Esquire Nomineeso Sourced where the shares are held (now largely govern by s 44 ITAA 1936) o S 44 provides that the source of the dividend is where the profits from which the
dividend is paid were derived.)
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o But s 44 does not permit tracing of those profits back through a chain of companies.
What do we tax? Income tax formula in s 4-10(3)
Income Tax= (Taxable Income × Rate )−Offsets
‘Ordinary’ v ‘Statutory’ Incomeo Whether a particular payment is income “must be determined in accordance with the
ordinary concepts and usages of mankind except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income”.
Per Jordan CJ in Scott (1935) Gross Income:
Gross Income=AllOrdinary Income+ All Statutory Income
o Depends on resident status (see 6-5 and 6-10) Residents – worldwide gross income Non-residents – Australian source gross income
Assessable Income:
Assessable Income = Gross Income – Exempt Income – Non-Assessable Non-Exempt Income Exempt Income – 2 ‘Classes’ (Div 11)
o Income will be exempt if (s 11-1): Income of ‘exempt entities’ (List in s 11-5) Income which is exempt (List in s 11-15)
Non-Assessable Non-Exempt Incomeo Non-assessable, non-exempt income is ordinary or statutory income that is expressly
made neither assessable nor exempt income (see s 6-23).o Income so categorised has no tax affect whatsoever for the receiving taxpayer.
Deductionso Deductions reduce the income on which you are liable to pay tax.o They are expenses you incur in the course of earning your assessable income; or,o Other outgoings specifically made deductible by the Act (e.g. gifts to charities).
Tax Offsets (Rebates and Credits) (Div 13)o Tax offsets reduce tax payableo They do not reduce assessable incomeo Examples
Foreign income tax offsets (‘FITO’s – what were formerly called ‘foreign tax credits’);
Franking credits on dividends; Rebates for family situations (e.g. dependant (invalid and carer) tax offset, low
income rebate); Rebates for some expenses (e.g. medical expenses).
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Week 1
Tax Rates Rates depend on the taxpayer (individual or company and resident or non-resident) Companies pay tax at a flat rate of 30%
Resident individuals pay on a sliding scale:
Taxable income Rates 2014/15 and same 2015/16 (%) First $18,200 0% $18,201 - 37,000 19% i.e. 19 c for each $1 over $18,200 $37,001-80,000 32.5% i.e. $3,572 plus 32.5 c for each $1 above $37,000 $80,001-180,000 37% i.e. $17,547 plus 37 c for each $1 above $80,000$180,001 and over* 45% i.e. $54,547 plus 45 c for each $1 above $180,000
Non-resident individuals pay on a sliding scale
Taxable income Rates 2014/15 and same 2015/16 (%)First $80,000 32.5%$80,001-180,000 37%$180,001 and over* 45%
* For the 2014/15 and 2015/16 income tax year, resident and non-resident taxpayers are subjected the 2% temporary budget repair levy which applies to that part of taxable income that exceeds 180,000.
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Week 2
Week 2
Income – General Principles
Income tax formula (s 4-10(3))
Assessable Income
S 6-1 Diagram showing relationships among concepts in Division 6
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Week 2
Assessable income includes: All ordinary income (s 6-5); plus, All statutory income (s 6-10); less, Any exempt income (s 6-15); and, Any non assessable non-exempt income
Therefore:
Assessable Income = Gross Income – (Exempt Income + Non-Assessable Non-Exempt Income)Ordinary and Statutory Income
Section s 6-5(1)o Ordinary income is ‘income according to ordinary concepts’.
Section 6-10(2)o Statutory income includes ‘amounts that are not ordinary income but are included in
your assessable income by provisions [in the Act] about assessable income’. What the court have decided is income is income. There are no set or strict rules, though they
have provided guidelines (regular, ordinary, normal etc.) S 6-20 provides a list of what is exempt S 11-5 entities that are exempt, no matter what kind of ordinary or statutory income assessable
Exempt Income Section 6-20(1)-(3)
o Income will be exempt income IF it is made exempt by a provision of the ITAA or another Commonwealth Act.
Section 6-20(4)o An amount that is non-assessable, non-exempt income is NOT exempt income.
Non-Assessable Non-Exempt Income Section 6-23: An amount of ordinary or statutory income is non-assessable non-exempt income
if a provision of the ITAA or another Commonwealth law specifically makes it neither assessable income nor exempt income.
Assessable Income The ITAA does not define the term ‘income’ The ITAA deems some receipts to be ‘income’ for taxation purposes (e.g. non-cash business
benefits, tips and gratuities, post 1985 capital gains etc.) But, apart from that, determining whether a particular receipt is ‘income’ has been largely
determined by the courts
The Courts’ View Whether a particular payment is income must be determined in accordance with the ordinary
concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts that are not income in ordinary parlance are to be treated as income.
o Per Jordan J in Scott (1935) Whether a particular receipt is income that is taxable in the hands of a taxpayer depends on
whether it is:o Income on ordinary concepts (‘ordinary income’); or
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Week 2
o Income under some specific statutory provision (‘statutory income’); and
o Whether it has been derived Blake
Statutory Income Receipts that would not be income under ordinary concepts but which are included in income
because some provisions of a taxing statute make them income Examples include:
o S 15-2 (allowances, gratuities etc.)o S 15-15 (income from profit making undertakings or plans)o Capital gains (s 102-5)o Deemed dividends (various sections - including Div 7A)o Balancing adjustments (Div 40)o Recoupments (s 20-20)o Some ETPs
See s 6-25(2) relationship of other income with ordinary income
Income includes Income from personal exertion
o Income from businesso Income from profit-making schemes
Income from property
Ordinary Income Whether an amount is income ‘depends upon its quality in the hands of the recipient’
o FCT v Mc Neil Therefore the receipt must be income in the hands of the taxpayer
o Federal Coke v FCT General Principles1. It must ‘come in’ to the taxpayer (FCT v Cooke and Sherden).2. Not everything which comes in is necessarily income:a. Mutual paymentsb. Windfall gainsc. Capital receipts3. It must be money or something convertible to money.4. It often exhibits characteristics of periodicity, regularity and recurrence.5. Income substitution or compensation payments may be income.6. Illegal, immoral and ultra vires receipts may be income.
It Must ‘Come In’ Generally for an amount to be income, it must ‘come in’ to a taxpayer
o Tennant v Smitho FCT v Cooke and Sherden
It is not just a savingo However, if it is coming regularly it could be a saving
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Week 2
Not Everything That Comes In is Necessarily Income ‘Mutual payments’
o The Mutuality principle: A taxpayer cannot derive taxable income from payments to him/ herself
Bohemians Club v FTC To be ‘income’, the receipt must arise from a source outside the taxpayer. It
applies particularly to income received by clubs and societies from dealing with their members.
Income from business activities aimed at producing a profit (as opposed to a ‘surplus’) and from non-members is taxable.
Income has to be from an outside source to receive it, i.e. making a purchase and getting a refund for it is not an income because it is your money anyway.
Municipal Mutual Insurance Limited v Hills Bohemians Club v FTC
Paid money to that club as membership, issue was whether excess amount that wasn’t spent for the members was income.
Found not to be income to the club, because the members are the club itself. Therefore the money did not come from outside the club.
o Income of clubs Is the receipt exempt income? If not, the ‘Mutuality Principle’ produces three (3) possibilities:
The receipt is wholly exempt because it comes from members The receipt is wholly taxable because it comes from sources outside the
club The receipt is partly assessable because it comes from the general trading
activities of the club which cannot be sourced to members alone Can be partly assessed – club meals and drinks from the bar, if members are
distinguishable from non-members; however, if they cannot distinguish they will portion it
Gainso The ‘normal proceeds’ of personal exertion, property or business are income –
‘Windfall Gains’ are noto Income = a form of financial ‘gain’o Under tax law, only realised gaino However, not all realised financial gains will be treated as income – courts distinguish
between income and capital gainso Windfall gains
Fall into two main categories Gambling winnings Gifts
Are generally not taxable unless (in the case of gambling proceeds) they are the result of income earning related activity (e.g. a ‘business of gambling’)
Brajkovich Capital receipts
o Our system was designed to tax ‘income’.
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o The concept was based on the trust law distinction between capital and income (the ‘tree’ and the ‘fruit of the tree’ analogy).
o Capital receipts were not taxed (and still are not taxed) unless they are covered by the CGT provisions
o Once it’s classified as capital it is not ordinary income.o The tree is the capital and the fruit is the income
Eisner v Machomber So is it an asset that is purchased for the sole purpose of an investment, to
produce future income?
Cash Or Cash Convertible According to ordinary concepts, to be income the receipt must be in the form of money or
something convertible into moneyo Tennant v Smitho FCT v Cooke & Sherden
This principle is now subject to the contrary intention of parliament found in the ITAA. For contrary intention of parliament, see:
o S 15-2 taxes the ‘value to you’ (subject to the FBT legislation – see s 23L) Does not work in a subjective view, it only works as if it’s a monetary income If it’s a fringe benefit, s 23L means it is non-assessable non-exempt income of
the taxpayer if it is under $300o S 21 deems a money equivalento S 21A deals with ‘non-cash business benefits’
Common Characteristics Periodicity Regularity Recurrence
Income Substitution and Compensation Payments Income substitution payments (key money instead of rent, sign-on fees instead of salary) are
regarded as income Compensation payments take the character of the receipt they replace
o FCT v Meeks Div 20-A specifically makes certain ‘recoupments’ assessable (i.e. as statutory income).
Income from Illegal Activities Assessability of receipts Deductions for outgoings (briefly)
o Under the general lawo Under s 26-54 and s 110-38 – illegal activity outgoingso Under s 26-5 – Fines and penaltieso Under s 26-52 and 26-53 – Bribes
S 167 default assessment
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Week 3
Week 3
Income from Personal Exertion, Property, Business, & Trading Stocks
Categories of Income Income from personal exertion
o Income from businesso Income from profit-making schemes
Income from propertyo Trading Stock
When you have rewards for service and payments incidental to service, this would be ordinary income; however not payments for restricted rights are not
Income from Personal Exertion Will normally include:
o Salary and wageso Directors’ feeso Payments and prizes received by professional sportspersonso Fees and commissions
Will not include income that is mainly from:o The use of assetso The sale of assetso A business structureo Granting the right to use property
So if paid for work done due to a contractual obligation (employee/sub-contractor), this is ordinary income.
3 situations where it is not as clearo Gift given to you by party you have performed services foro Gift given to you by someone you have not performed services foro Money given to you for giving up something
Underlying principle for all 3 categories:o Is there nexus between service and payment?
Gift given to you by parties you have performed services foro Issue: Was the gift for personal reasons (not ordinary income) or for income earning
activity (ordinary income).o Rule: Gift will be ordinary income if it is a ‘product or incident of employment or a
reward for services rendered’ Hayes
o If there is a strong connection between the payment and the service, then it is more likely to be ordinary income
Scott Harris
o The court will look at all the factors and weigh up (Scott) Relationship of donor-donee What is the character of it in the hands of the receiver Nature of employment Manner the gift was make Was it expected?
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o If it’s one-off, then it is less likely to be ordinary income, if it is regular, then it is more likely to be ordinary income
Harris Also discusses motive of donor Did everyone get that amount Was it determinative of the length and quality of the work
o Ultimate question: Is there a sufficient nexus between gift and income earning activity of recipient?
Yes – ordinary income No – capital To determine this, court will look at factors:
Expected Regular Motive of donor Whether already remunerated Did others get paid? Others
o Note that factors are not definitive, but only help decide the ultimate question
o Can it be traced to some personal relationship? Hayes Scott
Widower Solicitor completed the distribution of the estate after her husband
passed away The widow and the solicitor were friends, so she gave him a gift
afterwards, in spite of the fact that she had already paid him It was not found to be ordinary income
o Supplementary income may constitute income where it is periodic, expected, and relied upon to support family
Dixon He was conscripted to fight in the war and his salary was less than his
ordinary job The employer gave him the difference between his salary and his war
salary The court said this was ordinary income This is because it was still incidental to his employment, it was periodic,
and his family relied on it to live on Also used the replacement principle
Contrast with Harris Ex employee’s got pension at this time Because of high inflation, this did not cover cost of living Employer provided ex employees a lump sum because of this Court found that this was not ordinary income It was for personal reasons It did not depend on the length or quality of their work One off-lump some was considered
Gift by parties you have not performed services foro Voluntary payments may be income
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Week 3
Moorhouse v Dooland A professional cricketer was entitled to his weekly salary plus talent
money and a collection from the crowd The court was looking as to whether the crowd collection was ordinary
income The court found that it was as it was part of his contract, and he had an
expectation to get this money, periodico Payments made by third parties that are ‘incidental’ to the taxpayer’s employment may
be income Kelly v FTC
Best and Fairest winner AFL would get a cash award Paid by Channel Seven Was this prize ordinary income? The court said yes as it was directly related to the employment, and
caused by the employment, even though it was unexpected and not periodic
Distinction between payment for services and giving up a right/asseto Compensation rule: Compensation assumes the character of the thing for which it is
paid FCT v Meeks Compensation for giving up income will be income Compensation for giving up capital will be capital
o Payments for services v sale of an asset Brent
Taxpayer was a train robber Was paid by a journalist to tell his life story She claimed that when she was receiving the money she was giving up
copyright, and thus it was payment for capital, not ordinary income Copyright does not exist until it is recorded Therefore, the court said that it was ordinary income, as she was being
paid to provide a service – telling the service The copyright was found to belong to the journalist Had she written the story then given it to the newspaper, it would have
been differento Payments for relinquishing rights
Jarrold v Boustead Jarrold was a rugby player and he gave up his amateur status and that
was considered to be capital Therefore, payment for giving up his amateur status was considered to
be capitalo Payments for entering into restrictive covenants
Restrictive covenants = payment for not doing something. These types of agreements would usually be capital.
Higgs v Olivier Made a movie, agreed not to enter into a movie for the next eighteen
months The court said it was capital, as he was giving up his right to make
movies FCT v Woite
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While Woite was working for them, he entered into an agreement not to play for another team
He was not found to be giving up anything Therefore, ordinary income If there is no real restriction, it is not capital
Statutory interventiono Three areas of statutory intervention:
S 15-2 ITAA 1997 Fringe Benefits Tax (FBT) Termination payments
o If it’s not 6-5, it may be 15-2 (value to the taxpayer) Only applies when it is a tax benefit
o Also applies to CGT Whenever something is not 6-5, look to whether it is statutory income
o S 15-2 1) Provides that the value to the taxpayer of any allowances, gratuities,
compensation, benefits, bonuses or premiums provided in respect of employment is assessable to the taxpayer.
2) Since the introduction of FBT (on 1 July 1986), s 15-2 is limited to cash allowances, bonuses etc. paid in relation, directly or indirectly, to any employment or the provision of services.
Fringe Benefitso A fringe benefit is a benefit provided by an employer to an employee in respect of the
employmento S 23L(1) makes fringe benefits non-assessable non-exempt incomeo Fringe benefits are taxed in the employer’s hands and not the employee’s handso At the fringe benefits tax rate – 2013/14: 46.5%, 2014/15: 47%, 2015/16 and 2016/17:
49%, from 2017/18 onward the rate reverts back to 47%o FBT is a loss or outgoing incurred by the employer in gaining or producing assessable
income – so is deductible to the employer. Termination Payments
o Termination payments are any payments received for leaving employment.o Now dealt with under particular statutory provisions which:
Make such payments taxable; but Tax them concessionally (if at all)
Income from Property Interest: What is it?
o Interest is the fruit that flows from the capital (loan) Westminster Bank Case
o Normal Loan: Lender gets right to capital/ principle and interest. Lend $1,000 at a 10% interest. Borrower gets $1,000 and repays $1,000 (capital) and $100 (interest). Lender gets right to $1,000 (capital) and $100 (interest).
Interest: Discounts and premiumso Loan Discount:
Lender gets right to more capital and less interest if any.
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A bill has a face value of $1,000 and is issued at $800. On Borrower gets $800 and on maturity has to repay $1,000. Here $200 will be interest and OI to the financial lender or may capital in other
circumstances o Loan Premium:
On Borrower gets $800 and prepays a premium; the notional principle and interest on the notional loan.
To the lender the premium would be capital unless they are disguised interest. Ask whether it is a genuine premium for capital risk or disguised interest?
If there is a real risk, its capital, if it’s a disguised risk, it’s ordinary income under 6-5
o If it is not ordinary income, it will be statutory income Lomax v Peter Dixon
o The taxpayer was a company who had lent money to Finland before WWII
o There was a high security risk in Finland due to threatso They charged a higher premium due to the risko The court said it was capital as there was a genuine risk of non-
payment Implicit interest
o If an asset is worth $100 and is sold for $120, with the price to be paid in 12 equal installments of $10, is the entire $120 a capital payment for the asset?
See Vestey Debt defeasance arrangements
o You borrow $1,000,000 repayable in 10 years. To get the debt off your books you pay X Ltd $1/2 million now to take over your repayment liability.
o Ask: Is the $1/2 million you saved income? Unilever
If you are in the business of financing, it would be ordinary income Orica
If you are not in the business of financing, then it is not ordinary income, as the argument is that that saving is not a profit, it is a saving
It is an unusual and isolated activity Myer
When you first borrowed this money, did you intend to on sell it to another to make another half a million?
If yes, then it is ordinary income CCT is applied to the original borrower
Rento 6-5 ordinary incomeo Premiums
Prior to Sept 85 not ordinary income because capital Now assessable as CGT event F1
When there is a high demand and low supply for property Potential tenants, because they cannot get a place, would pay the lessor
to accept their application In this regard, when the landlord receives the payment as capital F1 event Payable under CGT
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o Incentive A situation where there is low demand and high supply The difference is the landlord is making payment to a potential tenant to take up
residence in their property When the tenants get that money, what is it to them?
Tax ruling 2631 Cash: ordinary income
o Montgomery Partner in a large firm decided to move the business to a
different building for $30 million over three years Issue was whether the lease incentive was ordinary
income to that partner It was an ordinary incident of the firm’s activity The firm entered into the agreement to get this
inducement Federal court said it was capital Three quarters of the High Court said it was ordinary
income. They applied the Myer principle Consider: Is this a common occurrence in the market at
that moment?o Myer
CGT event H2o S 118-20 Include it as assessable income somewhere else before
H2 applies Non-convertible
S 21A Royalties
o 15-20 statutory income, intellectual property that you are allowed to use and get paid for, and therefore usually be ordinary income
Capital Gainso If you sell your property, you are selling the capital
Income from Business Receipts arising from the normal activities of a business are income according to ordinary
concepts (‘ordinary income’). Two questions arise:
o Is the taxpayer engaged in a ‘business’? o If yes, did the receipt arise from the normal activities of the business?
If ‘yes’ to both, the receipt is prima facie ‘income’. First Issue: Is it a business or a hobby?
o Important differences: Hobby
When you make money from a hobby it is not ordinary income and you can’t claim deductions
If you can prove a hobby is a business then it might be classified as a non-commercial business.
Business An Employee is excluded from the definition of business: s 995-1
o Indicia of a business
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Week 3
System and Organization: Commerciality; Scale of Activities; Sustained, regular and frequent transactions; Profit Motive; Commercial character of the transactions; Characteristics or quantities of property dealt in; Inherent characteristics of the Taxpayer; and Ancillary matters
o Ferguson Profit motive/intention is important, but it is not necessary in its initial stage It does not matter if never made any money, intention to make money is enough
o Walker Scale of activity is not determinative of whether there is a business Here Walker only had three goats, still a business It does not matter if never made any money, intention to make money is enough
o Stone A javelin thrower was able to turn her javelin throwing skills into a business Received prize money from competitions, government grants, promoting
products, money for speaking appearances Court said she had turned her skill into a business as she sought out those
sponsorships and entered into deals that gave her javelin throwing activity a business flavour
o Brajkovich The normal proceeds of a business depend on:
o The nature and scope of the business Ask: What the taxpayer is in business to do?
o The relationship between the business and the specific receipts in question. Ask: Did the receipt result from some activity that falls within what the taxpayer
is in business to do? Problem areas
o Isolated or one-of transactionso Extraordinary transactionso Realisation of revenue assetso Compensation for cancellation of contractso Treatment of trading stock
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Week 3
Is the receipt inside or connected to the circle? GP International Pipecoaters
o Company set up by government contract to build pipe coating factory and then use the factory to coat pipes
o Under contract paid two sums: one to build factory, other to coat pipeso Money to coat pipes is ordinary income, but what about money to build factory?o Court said that is also ordinary income, because the reason the business was set up was
to satisfy the government contract, so the scope of the business included both Californian Copper Syndicate
o Made a distinction between mere realisation of an asset (not ordinary income) as opposed to acts that are carrying on the business itself
o Taxpayer was incorporated, and memorandum association says that their main objective was to acquire land which contained copper
o Spent majority of money to buy copper bearing land, did not have sufficient money to extract copper, and never extracted any
o Later sold land to another company, court had to determine whether the receipt was ordinary income
o Was found to be ordinary income as at all times the company’s intention had been to make a profit selling land – never had enough money to extract copper
Scottish Miningo Different from Copper Syndicate because Scottish Mining actually mined land for coalo Exhausted the mineral and then sold the land, but first subdivided and built roads and
other infrastructureo Court held that profit from sale of land was not ordinary income as company was not in
the business of selling land, it was merely realising their capital to its best advantage
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Week 3
Whitfordo Said would have decided Scottish Mining differently – did not overturn it thougho Group of fisherman created a company and bought land on the beachfront to fisho Land went up in value, and they sold their shares in the company, and the new
shareholders developed the land, subdivided, and sold as residential propertyo Were these sales ordinary income?o Court said company was carrying on the business of land development, so they wereo At the time the new shareholders acquired the company, the intention of the company
changed – now in the business of developing lando Company had also become one in the business of developing and selling land because
the developments were so extensive – gone beyond mere realisation to its best advantage
o Another point is that judges were controversial in taking net approach rather than gross amount with claiming deductions separately
Extraordinary Transactions Myer
o Gains made from extraordinary transactions may be income where they arise from a commercial transaction entered into by a taxpayer with the intention of making a profit
o Where a future right to interest is converted into a personal lump sum, the present lump sum amount will be income as it replaced future interests, which when derived would be treated as income
o Facts Myer lent $80 million to its subsidiary for seven years Subsidiary would then have to pay interest and capital back Myer sold the right to interest, but not the principle to City Bank for $45 million Issue is Myer would not have lent money to a subsidiary had they not been able
to sell the right to the interest Was the $45 million ordinary income? Court said yes, because it was a commercial transaction with a profit making
intent Westfield
o Clarified Myer because it says that the means to make the profit has to be what was intended in entering into the transaction
o Facts Did business by acquiring land, building their shopping centre, then managing it Realised that this wasn’t the best business strategy because they were sinking
capital in land ownership, so they sold the land and were contracted back to build and run the shopping centre
Court said not every profit with the Myer principle is ordinary income The means by which the profit is made must have been their intention at the
time then entered into the transaction At the time they bought the land, they intended on building and running a
shopping centre – the land was capital, it was never intended to be sold to make money
The possibility of selling land is not the same as intention Cooling
o Lease-incentive case
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Week 3
o That profit making intent must not be insignificant, but it doesn’t have to sole or dominant
o Facts Brisbane law firm in moving into a new building received a lease-incentive Court said that Myer applied Taxpayer argued that they needed a place to run their business, the incentive
was not the sole or dominant reason for entering into the transaction The court said that it was not insignificant, it doesn’t have to be sole or
dominant
Revenue Asset When a business is investing in shares, the investment is likely to be a capital, but where it is a
revenue asset it is likely to be ordinary income Colonial Mutual Assurance
o A mutual life insurance society that invests its funds in stocks and debentureso Adopted the policy of investing in securities was the most effective way of making
money for their businesso Court said that the taxpayer should be assessed on the profit of realising those capital
investmentso An insurance company is undoubtedly carrying on an insurance business and the
investment of funds is as much a part of that business as collecting premiums National Bank of Australia
o Contrast with Colonial Bank of Australia, have to look at circumstanceo Bought shares with the intention of a merger – not about investmento When they sold those shares, it was therefore capital and not revenue assets
Treating Trading Stock The full proceeds of any sales are assessable in the year of sale as a gain from carrying on the
business of trading – s 70-80(1) and s 6-5 The full cost of purchasing trading stock is deductible in the year of purchase – s 70-15;
o Compared to s 8-1 deduct when you incuro S 70-15 says you deduct when you have it on hand
‘On hand’ – when you have the power to dispose of the stock All State Frozen Food
Therefore do not need legal ownership or physical possession, as long as you have the power to dispose of it
Any changes in stock levels over the trading year (opening and closing values) is accounted for by (s 70-35):
o Including in income any excess of closing stock over opening stock; oro Allowing as a deduction any decrease in stock over the period.
The opening stock figure is the same as the previous year’s closing figure (s 70-40); Three alternative bases for valuing closing stock on hand; s 70-45 ITAA97:
o Costo Market selling valueo Replacement value.
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Week 4
Deductions
Section 8-1: General deductions (1) You can deduct from your assessable income any loss or outgoing to the extent that:
o (a) It is incurred in gaining or producing your assessable income; or o (b) It is necessarily incurred in carrying on a * business for the purpose of gaining or
producing your assessable income. Note: Division 35 prevents losses from non-commercial business activities that may contribute
to a tax loss being offset against other assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
o (a) It is a loss or outgoing of capital, or of a capital nature; or o (b) It is a loss or outgoing of a private or domestic nature; or o (c) It is incurred in relation to gaining or producing your * exempt income or your *
non-assessable non-exempt income; or o (d) A provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12-5. (3) A loss or outgoing that you can deduct under this section is called a general deduction. For the effect of the GST in working out deductions, see Division 27. Note: If you receive an amount as insurance, indemnity or other recoupment of a loss or
outgoing that you can deduct under this section, the amount may be included in your assessable income: see Subdivision 20-A.
S 8-1(1): The Two Positive Limbs You can deduct from your assessable income any loss or outgoing to the extent that:
o It is incurred in gaining or producing your assessable income; ORo It is necessarily incurred in carrying on a business for the purpose of gaining or
producing your assessable income. Note that only businesses can rely on the second limb First limb
o Elements There must be a loss/outgoing expense And it must be connected with the producing of assessable income
o Typically include: Work clothing Tools of trade Technical journals Self-education expenses Home office expenses Motor vehicle expenses Professional association fees
Second limbo Elements
There must be a loss/outgoing expense Must be connected with the carrying on of a business It must be a business (addressed in Week 3) Must be necessary
o Will typically include
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Week 4
Cost of acquiring trading stock Plant/equipment hire costs Salary/wage costs Expenditure on market research Rental costs Interest and bank charges Advertising expenses FBT Cost of utilities
‘Loss’o Charles Morre
Ran a production company in Perth Each morning would take previous day’s cash to the bank Was held at gunpoint and robbed Court held that this was a loss as taking money to the bank is a necessity and
was the ordinary carrying on of their business Apportionment – ‘to the extend that’ indicates a loss or outgoing may need to be apportioned
o Ronpobin Pino Two types of mixed exp:
Consists undivided items in respect of things/services of which distinct and servable parts are devoted to gain/producing assessable income and other cause.
A single outlay/charge that serves both objects indifferently. ‘Incurred’
o The loss/outgoing must be ‘incurred’ in the year it is claimed as a deduction.o An outgoing is ‘incurred’ when the taxpayer is definitely committed to the outgoing –
this may precede actual payment.o S 26-10 applies to leave payments.o If there is no provision to say when the loss occurred, refer to cases and the facts
‘In’o The connection/nexuso To be deductible, the loss/outgoing must be relevant and incidental to the gaining of
assessable income – that is, there must be a connection between the expenditure and the income production.
Gaining/producing assessable income (first limb) Carrying on a business for the purpose of gaining/producing assessable income
(second limb)o There are a number of different tests in case law
Incidental and Relevant Look to the operations/ activities regularly carried on for the production
income than to purpose in itself. Is it incidental to what they do? Amalgamated Zinc
Essential Character Done separately to incidental and relevant Used when there is an expense that has a private labour to it Is it essentially a business expense, or a private expence? Objective or subjective approach?
o Objective approach – what benefit to you get from it? Cecil Brothers
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Week 4
Phillipso Subjective
Will only look at subjective approach when something is not right about it
High expense and low gain – the court will then look to the subjective intention of the tax payer
Temporal Connection Courts have adopted not required a particular loss or outgoing to be
matched with the production of a specific amount of assessable income Will only consider timing when there is a pre- and post- business
expense (haven’t started/have finished business) Pre-business expenses are not normally deductible
o Softwood Pulp and Paper Ltd The taxpayer had not yet committed to the project nor
made a definite decision to do soo Griffin Coal Mining Company Ltd v FCT
The expenditure did not relate to their existing business, but to a new source of income
o However, there draws a distinction as to whether they are already committed or not. Where they have committed, they may be deductible
Travel Lodge Papua New Guinea Steele
o Note that there may also be an exception for small business entities seeking advice in establishing their business
Post-business expenses are not normally deductibleo Amalgamated Zinco However, if you can satisfy the following test, then they are:
Whether the ‘occasion for the loss/ outgoing [can be] found in the business operations’ directed to gaining or producing assessable income
Placer Brown Jones
‘Necessarily Incurred’o Courts have interpreted the word ‘necessarily’ liberallyo Snowden & Wilson
Dixon, J ‘Necessarily’ = to be dictated by business ends (what is good for the business)
Fullager, J ‘Necessarily’ = within reason, to be judged by person who is carrying out the business
o This does not mean that the expense must be unavoidable Magna Alloys
S 8-2: The Four Negative Limbs However you cannot deduct a loss or outgoing to the extent that:
o It is a loss or outgoing of capital, or of a capital nature; oro It is a loss or outing of a private or domestic nature; oro It is incurred in relation to gaining or producing your exempt income; or
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Week 4
o A provision of this Act prevents you from deducting it. The First Negative Limb: Three tests
o Once and for all Vallambrosa Rubber If it is one payment, then it is likely to be capital If it is regular, then it’s revenue
o The ‘enduring benefit’ test British Insulated Is it looking to bring an asset that is lasting in nature? If so, it is likely to be capital
Not necessarily thougho The ‘business entity’ test
Sun Newspapers The starting point If it relates to the business structure, then it is capital If it relates to process, then it is income
Does it simply allow the business to operate? If so, it is process
Three factors that need to be taken into account to determine if it is structure or process
Would the character of the advantage sought be lasting The manner it would be used The means adopted for payment
o If it is capital, it cannot be deducted under s 8-1 There are three alternative options
CGT Specific deductions
o Depreciating asseto Capital expenditure that is not otherwise deductible may be
deductible over 5 years under s 40-880 ITAA 1997.o Called ‘blackhole expenditure’, it covers business capital
expenditure not otherwise taken into account and not denied a deduction under some other provision of the Act.
The Second Negative Limb: Private or Domestic Expenditureo Anything not directly connected to your income-earning activities.
The Third Negative Limb: Expenditures incurred in gaining exempt income or non-assessable non-exempt income
The Fourth Negative Limb: The Act Prevents Deductiono Any expenditure that the Act specifically makes non-deductibleo Examples include:
Business entertainment – Div 32, especially s 32-5. Fines and penalties – s 26-5. Some otherwise deductible education expenses - s 26-20 (HELP/HECS
payments); s 82A (first $250 of other expenditure). Some corporate carry forward losses and bad debt write-offs – Div 165). Excessive payments to associates – Div 7A and s 26-35
Common Types of 8-1 Deduction Travel to or on work
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o Cost of travel ‘on’ work is deductible. Lunney
o Cost of travel to find new employment is not deductible. Maddalena
o Cost of travel to and from work is not deductible; Hayley Exceptions
Itinerant workerso Wiener
On stand-by dutieso Collings
Transport bulky goodso Vogt
Two distinct places of worko S 25-100o One of those workplaces cannot be home
o If claiming motor vehicle expenses, rules apply under div 28 that apply to partnerships and individuals, and the expenses must be substantiated under div 100
Self-Education Expenseso Are deductible if:
If directly relevant to the taxpayer’s current income earning activities. If they enable taxpayer to keep abreast of developments in his/her field
Finn If they will enable the taxpayer to better discharge existing income producing
duties Wilkinson Studdert
If likely to lead to an increase in income Highfield
Linked to other kinds of assessable income Anstis
o Education is not considered capital in nature Hatchett
o If it can be connected to employment then it is not considered private Finn
o S 26-9 prevents from claiming a deduction if it related to rebatable benefitso Where there is HECS, there will be no deduction unless it is a fringe benefit under s 26-
20o In some cases there will be a limit on deduction under s 82Ao Non-Deductable
If designed to enable taxpayer to get employment or to get new employment. If designed to open up a new field of income producing activity. The first $250 of expenses in a ‘prescribed course of education’ (s 82A). Rebatable benefits (s 26-19). HECS payments (s 26-20).
o Deductable Child Care Expenses
o General rule – not deductibleo May be prerequisite but neither incidental or relevant
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o Essential character is private Martin 84ATC 4513
o Now, taxpayers are entitled to a Child Care Benefit - and a Child Care Rebate equal to 50% of the out-of-pocket cost of child care, over the amount of the benefit, up to a maximum of $7,500 per child per annum.
Subdivision 61-1A Home Office Expenses
o Where the taxpayer engages in income producing activity at homeo Must distinguish between
The home as a place of business The home containing an office or private study
o Where the place of business is at home, then can claim both occupancy expenses and running expenses
o Where there is only a home office, then can only claim occupancy expenseso Factors to indicate that it is a place of business
It is clearly indicated as a place of business The area is not suitable for domestic use It is used exclusively/almost exclusively for ordinary business Clients visit this space
o Factors to indicate a study A place of convenience Simply taking home work and completing it at home in this area
o Occupancy expenses Calculated on a floor area basis Must take into account parts of the year that the business is not operating Include
Rent Mortgage interest Rates Insurance premiums
o Running expenses Include
Heating, lighting and cooling expenses Cleaning costs Depreciation, insurance and repairs on equipment Leasing charges on equipment Maintenance costs Telephone expenses Internet expenses
o Note that this will fill main resident exemption when selling the home, will be CGT consequences
Clothingo Generally not deductible unless
Compulsory uniforms Non-compulsory corporate wardrobes
Registered under Div 34 Occupation specific clothing Protective and safety clothing and equipment
o Edwards
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Week 4
A governor’s wife’s assistant claimed that she was required to dress better and was able to deduct
Can only claim to the extent that it exceeds the previous year or other professional activity
o Mansfield A flight attendant was able to claim moisturiser, air conditioner, and shoes half a
size bigger Entertainment expense
o Generally not deductable under s 8-1 due to div 32 Especially s 32-5
o Exceptions are also found in div 32 Damages and legal expenses
o Generally deductible IF incurred in gaining or producing assessable income;o This can include expenses incurred in defending criminal proceedings related to your
income earning activities;o Unless an outgoing of capital or of a private nature
Broken Hill Theatres John Fairfax PBL Marketing
o But fines and penalties are not deductible – s 26-5o Some legal expenses are specifically deductible (e.g. Borrowing expenses are
deductible under s 25-25.) Interest Payments
o Interest paid on borrowed funds is deductible if the money was borrowed for the purpose of gaining assessable income.
Consider: was the money used for income producing purposes?o The deductibility of interest will usually depend upon the objective use to which the
borrowed funds are applied and not the security provided for the loan Munro (objective test)
o If colourable circumstance the court may consider the subjective purpose and may deny or allow apportionment
Ureo If it is a pre-business expense, consider level of commitment to the business
Steeleo Interest that is a post-business expense may be deductible
Amalgamated Zinco Refinancing principle: If you can deduct using the use these before the finance then
after the refinancing you can continue to deduct the interest expenditure. Roberts v Smith
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Week 5
Week 5
General deductions (s 8-1 ITAA 1997) This is a general provision under which most deductions are claimed.
Specific deductions (s 8-5 ITAA 1997) Deductions allowed under specific provisions for particular outgoings (eg depreciation)
Note: A number of provisions that deny deductibility where the outgoing might otherwise be deductible (e.g. entertainment expenses)Cannot claim double deductions
Specific Outright Deductions
Repairs – s 25-10 You can deduct expenditure you incur for repairs to premises (or part of premises) or a
depreciating asset that you held or used solely for the purpose of producing assessable income. If you held or used the property only partly for that purpose, you can deduct so much of the
expenditure as is reasonable in the circumstances. You cannot deduct capital expenditure under this section. Elements
o Expenditureo You incuro For repairso To premises or a depreciating asseto Held or used solely or partly
Issueso Is it a repair?o If it is a repair, is it of a capital nature?
Capital if: Addition Improvement Initial repair
Note: If you are unable to get a deduction for repair What is a repair?
o Repair involves restoring an asset to its previous condition without changing its character
W Thomaso Can involve the ‘renewal or replacement of subsidiary parts of a whole” but not
“reconstruction of the entirety’ Lurcott Lindsay
o Extensive works that constitute the acquisition of a new asset are not repairs Lindsay Western Suburbs
o Essential that the asset’s function does not change If the function changes, it is not a repair
o Pre-emptive repairs are deductible Repairs are not limited to rectifying defects that have already become serious Can’t claim a deduction if it results in an improvement
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Week 5
BP Oil Refinery Deductions can be claimed for work that is done partly (or even) largely to
prevent or anticipate defects or damage or to rectify defects in their early stageso Notional repairs are not deductible
Western Suburbs Cinemas Hypothetically, if there was a repair that could have been done, but you have
gone beyond it, you can’t claim for the cheaper amount that could have been done
This is because you haven’t actually done it If it is a repair, is it of a capital nature?
o Capital if Addition
Did the work result in an expansion of the basic capital structure? Improvement
Did the work make the item significantly functionally better than it was previously?
o Western Suburbs Cinemas Initial repairs
Did the defects exist at the time of acquisition?o W Thomaso Law Shippingo It is irrelevant if the defect was unknown at the time of purchase
o Improvement Use of materials different from the original is not necessarily fatal to the claim
for a deduction (especially if that use involves both advantages and disadvantages)
Ask whether the work improves the value of the asset (from its original state – not from its state of disrepair).
Does the expenditure reduce the likelihood of having to do future repairs?
Bad Debts – s 25-35 To get a deduction for writing-off a bad debt you must show that there was:
o A debt (an existing debt);o That you write off as bad;o In the income year; ando It was included in your assessable income for the income year or for an earlier income
year; oro Be in respect of money that TP lent in the ordinary course of their lending money
business Basically, make an assessment that the money is non-recoverable The debt had to be written off in the same income year as the bad debt Partial Write-offs
o If you get part of what you are owed but have to write off the balance you get a deduction for the part you write off – see s 25-35 (1) and (3)
Recovery of a written-off bad debto The recovered amount (referred to as a ‘recoupment’) is income and taxable in the year
of recovery – see s 25-35(5) Item 4 and ss 20-20(3) and 20-30(1) item 1.4
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Week 5
Carry Forward Losses – Div 36 Tax losses can only be carried forward and offset against income in a later year
o Can be carried forward indefinitely Carry forward losses are offset first against exempt income (if any) and then against assessable
income. They are offset in the order in which they were incurred The rules differ slightly for corporate tax entities (s 36-17) and other tax entities (s 36-15).
o Corporate tax entities may choose the amount they offset in the later year and may choose a nil amount
Gifts – Div 30 Cannot claim an 8-1 deduction
o Cannot use it to make moneyo Considered private
Specific deduction under div 30o Will only be deductible if they fall within div 30o Individuals giving to hospitals, schools, universities, sports, recreation or cultural
groups, etc. Must be $2 or more, and to certain recipients Must be genuine gifts
o Property must be transferred without any material benefit to the donoro Cyprus Mine Corporation
Deductions Over Time
Prepayments See ss 82KZL-82KZME Advance payments are generally deductible over the life of the benefit or 10 years, whichever
is the lesser (the ‘eligible service period’), unless they are:o ‘Excluded expenditure’ (amounts under $1000 or that are required to be paid by law or
by an order of a court or are salary or wages paid under a contract of service).o Non-business pre-payments by individuals - where the eligible service period is 12
months or less and ends no later than the last day of the next tax year (the ‘12 month rule’)
o Prepaid expenditure by eligible small business entities – the ‘12 month rule’ applies. If the eligible service period exceeds 12 months use the general rule.
Borrowing Expenses – s 25-25 A deduction is permitted for borrowing expenses PROVIDED the loan is used for income
producing purposes. ‘Borrowing expenses’ include loan establishment fees, procuration fees, legal expenses, stamp
duty and loan guarantee insurance etc. They do not include interest – which is separately deductible. Borrowing expenses are generally deducted over the life of the loan or 5 years, whichever is
the LESSER. Unless they amount to $100 or less - when you write them off in the year of expenditure.
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Week 5
Depreciation/Uniform Capital Allowance System – Div 40 Deduct an amount equal to the decline in value of a depreciating asset (see s 40-25); Which has a limited effective life and which is reasonably expected to decline in value (s 40-
30); Which is held by the economic owner (s 40-40); Beginning when you first use it or have is installed ready for use (the start time – s 40-60); And ending at the end of its effective life (s 40-95). Will not include intangible objects Choice of method to calculate decline in value
o Two choices available Prime cost method:
Asset cost × daysheld365
× 100 %effective life
Assumes a uniform decline in value Diminishing value method:
Base value × days held365
× 200 %effective life
Assumes greater decline in value in early years ‘Base value’ is the cost (in the start time year) and the opening adjustable
value (in subsequent years). The opening adjustable value Effective life
The commissioner determines the effective life, or you can estimate the effective life for your own use
o The choice is made on an asset by asset basis
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Week 6
Week 6
Substantiation
To be deductible under s 8-1 or a specific deduction provision certain types of outgoing/ loss will need to comply with substantiation rules. The substantiation provisions are contained in Div 900 and for ‘car expenses’, Div 28 ITAA97. Who must substantiate?
Those required to substantiate losses and outgoings are:o S 900-5(1) - an individualo S 900-5(2) - a partnership that includes at least one individualo S 900-5(3) - no other entity.
What records are required? The records differ depending on the type of expenditure involved. Therefore:
o Determine what sort of expenditure you are incurring;o Determine from Div 900 what records are required for that sort of expense.
What expenses must be substantiated? S 900-10
Work Expenses A work expense is a loss or outgoing you incur in producing your salary or wages
o S 900-30(1) To be able to claim a work expense deduction, first must qualify for the deduction under s 8-1,
then must provide the written evidence in s 900-E Must keep records of travel where it includes being away for six or more nights Must retain the records for five years
o S 500-25 900-115 – Written evidence from supplier 900-120 – Depreciation Two exceptions to requirement for record from supplier
o Claim for small items costing less than $10 each and totalling less than $200 in the year of income, you can make a record of your expenses
S 900-125o Expenses too hard to substantiate
S 900-130 No documentary evidence required for
o Total work expenses (including laundry/ excluding travel allowance and meal allowance expenses) are $300 or less – s 900-35
o Laundry expenses to $150 – s 900-40 Does not include dry cleaning
o Work related expenses related to an award transport payment – s 900-45o Domestic travel allowance expenses – s 900-50o Overseas travel allowance expenses – s 900-55o Reasonable overtime meal allowances – s 900-60o Airline crews – s 900-65
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Week 6
Business Travel Expenses A ‘business travel expense’, in so far as you incur it in producing your assessable income other
than salary or wages [s 900-95(1)]. An expense is a ‘travel expense’ if you incur it for travel that involves you being away from
home for more than one (1) night either inside Australia or overseas [s 900-95(2)]. Conditions of deductibility
o The expense must be deductible anywayo Written evidence is requiredo Travel records may be required
Car Expenses Two methods for calculating car expense deductions (Div 28):
o Cents per kilometre method Limited number of kilometres – 5000 business kilometres Number of kilometres based on reasonable estimate Commissioner determines rate (66c per kilometre 2015-16 income year) Does not need to be substantiated
o Log book method S 28-90(1): each car expense x business use percentage S 28-90(3): business use percentage = business kms
total kms Do it for the first year, and can use the same percentage for the next four years
unless chance in method or business use Substantiation
Log book for at least 12 weeks Odometer records
o Subdivision 28-H Written evidence of expenses Fuel and oil may be substantiated by odometer records Failing to substantiate
o Section 900-195 Commissioner’s Discretion Where taxpayer has not complied with substantiation
rules the Commissioner has discretion to allow a deduction if satisfied that the taxpayer had incurred the expense and entitled the deduction
o Section 900-200 Reasonable expectation Reasonable expectation that substantiation would not be
required (deduction may be permitted anyway).o Section 900-205 Lost or Destroyed Records
If you have a complete copy then you may treat it as an original.
If not, but you took reasonable precautions to prevent the loss or destruction, the balance of s 900-205 applies to you.
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Week 6
Tax Accounting
Derived Determine when income is derived by
o The application of ordinary business and commercial principles and ... the method of accounting to be adopted is that which is calculated to give a substantially correct reflex of the taxpayer’s true income
Gibbs J in Brent 71 ATC 4915 at 4920.
Alternate Methods of Accounting for Income The ‘cash’ or ‘receipts’ basis
o It recognises income only on actual or constructive receipt; The ‘accruals’ or ‘earnings’ basis
o It recognises income when it has been earned - irrespective of whether it has been received
o Income is earned when performance of the activity giving rise to the right to be paid is complete
Cash v Accrualso In broad terms
Trading income is brought to account on an accruals (or earnings) basis Appropriate where it is ongoing business activity, not on an individual’s
account All other income is brought to account on a cash (or receipts) basis
Better for smaller receipts Recognising income
o Taxpayers are not classified as receipts or accruals taxpayerso The various types of income they receive are recognised on a receipts or accruals basiso A single taxpayer may therefore recognise different types of income differently
Look at situation and activity
Personal Exertion Income Employees
o Use the cash basis; Large business
o Use the accruals basis Rowe & Sons
Professional practices providing personal serviceso If the profits of the business are primarily attributable to the services of the principal,
use the cash basiso If the profits are attributable to other factors (employees, turnover of trading stock, use
of circulating capital, use of credit facilities etc.) – use the accruals basis. Henderson’s Case
Changing methodso A taxpayer is permitted to change their method, as their method has to provide a correct
reflection of their true income Henderson’s Case
o However, cannot change if it is to obtain a tax advantage Henderson’s Case
o Accounting practice was returning income on a cash/receipts basis
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o Became 19 partners, 200 employeeso Wanted to change to accrualo In that change, they benefit from income that is unattributedo Under the receipt rule, they would only derive the income they receivedo Under the accrual method, they derive income when they earnedo Therefore, there was $180 000 that they did not attribute in any yearo It was found that they were running a bigger and more complex business so they could
changeo Each year is to be treated separately, so there was no adjustment
Interest Income Generally derived when received (actually or constructively) Exceptions
o Where the taxpayer is in the business of lending, must do it on a daily accrual basiso When a non-money lender derives interest as an integral part of its trading activities;o When interest is earned on certain deferred interest securities to which Div. 16E applies.
Dividends Derived when ‘paid’ [ITAA 1936, s 44(1)]: ‘Paid’ includes credited or distributed
o [ITAA 1936, s 6(1)]. Payment connotes receipt - so a cash (or receipts) basis of accounting is appropriate. Has to be actual payment, not a declaration that payment will occur
Rent No specific section – use s 6-5; Generally, you recognise the income when it is received (ie use the cash basis); Unless it is received in advance and is subject to a possible refund on premature termination of
the lease – when you may use an accruals basis.
Time Payment Transactions Can only be used for cash-based taxpayers Cash-basis taxpayers may use a ‘profits emerging’ basis to recognise income
o Arthur Murray (1965) 114 CLR 314 Taxpayer was giving dance lessons, were being paid in advance Wanted to use profits emerging basis, because they put the money in a separate
account that was not treated as their own, as there was the possibility that they would provide refunds if they did not provide the service
Deductions Section 8-1 permits a deduction for losses and outgoings when they are ‘incurred’.
o ‘Incurred’ is not defined in the Act.o ‘Incurred’ is not the same as ‘received’.o On ‘ordinary commercial and business principles’ losses and outgoings are incurred
when an irretrievable obligation to make payment arises;o Therefore, there is no difference between cash-basis and accruals-basis taxpayers
Taxation Ruling TR 97/7). Exceptions
o Prepayments
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Generally the deductibility of pre-payments is spread over the life of the benefit or 10 years (ss 82KZL-82KZO)
The reason - to prevent pre-payments being used to avoid paying tax.
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Week 7
Capital Gains Tax
Significance of 20 September 1985 Capital gains tax was introduced in Australia on 20 September 1985 Generally there would be no CGT consequence when an event happens to an asset acquired or
created before 20 September 1985 (Pre-CGT assets) Generally there would be CGT consequence when an event happens to an asset acquired or
created on or after 20 September 1985. (CGT assets)
Income Tax Formula (s 4-10(3))
102-5: assessable income includes net capital gain. If you have a net capital gain it is a form of statutory income. Note there is one exception to the rule, K6. When you have a net capital loss, it is not a deduction.
Anti-Overlap (s 118-20) A CGT event which gives rise to a capital gain under ITAA97 Pt 3-1 may also be assessable
under other provisions of the tax law, such as ITAA97 s 6-5 S 118-20(1): Reduce capital gain by the amount included in assessable income under the other
provision(s) In such circumstances, ITAA97 s 118-20(1) is designed to prevent double taxation
Trigger for CGT The trigger for CGT is the happening of a ‘CGT event’ in relation to a ‘CGT asset’ S 102-20: make a capital gain or loss if a CGT event happens. You do not have CGT consequence unless you realise that gain or loss. Therefore it can be
shelter over the years until you realise it. Wait until a year that it is low, and appropriate for you to make a decision.
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CGT Assets Definition of CGT asset (s 108-5)
o Any kind of property, oro A legal or equitable right that is not property
Exemptions (Div 118)o Pre-85 assets o Cars o Main residenceo Collectables acquired for $500 or lesso Personal use assets acquired for $10,000 or lesso Depreciating asset (s 118-24)
If it is depreciating and for 100% taxable purpose, then it would be exempt from CGT. When it is used partly for business purposes, it will be a K7 event tp capture the private purpose part.
o Trading stock assets o Gambling and prizes
Land, shares, options etc. are assets. Exempt assets
o S 118-5 – a car, motor cycle or similar vehicleo S 118-5 – valour decorations;o S 118-10 – ‘collectables’ acquired for $500 or lesso S 118-10 – ‘personal use assets’ acquired for $10,000 or less;o S 118-12 - assets used to produce exempt income.
Collectableso Defined in s 108-10(2) as:
Artwork, jewellery, an antique, a coin or medallion; or A rare folio, manuscript or book; or A postage stamp or first day cover that is used or kept mainly for personal use or
enjoyment.o Sets of collectables are deemed to be a single collectable: s 108-15(2).o How are disposals taxed?
If acquired for $500 or less, any gain or loss on disposal is disregarded S 118-10(1)
If acquired for more than $500: Any gain is taxed as an ordinary capital gain; and Any loss can only be offset against a capital gain from the disposal of
another collectable s 108-10(1). Note the $500 (i) is exclusive of GST if the taxpayer is registered for
GST purposes; (ii) includes GST if not registered. Personal Use Assets
o Defined in s 108-20(2): A CGT asset (other than a collectable) that is used or kept mainly for personal use or enjoyment
o S 108-20(3) – it cannot be land or a structure on lando S 108-25 – sets of personal use assets are deemed to be a single personal use asseto How are disposals taxed?
Any gain from the disposal of a personal use asset that was acquired for $10,000 or less is disregarded s 118-10(3).
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Any gain from the disposal of a personal use asset acquired for more than $10,000 is taxed as a normal gain.
Capital losses from the disposal of personal use assets are disregarded no matter what the acquisition cost s 108-20(1).
Note the $10,000 (i) is exclusive of GST if the taxpayer is registered for GST purposes; (ii) includes GST if not registered.
Exempt or Loss Denying Transactionso Section 118-37o Certain compensation receipts, gambling winnings and losses etc. o Gambling winnings, whether ordinary income under s 6-5 or not, would have a CGT
consequence – however they are exempt
CGT Events S 102-20
o You can make a capital gain or loss if and only if a ‘CGT event’ happens.o The gain or loss is made at the time of the event.o Timing of the event is crucial because that is the income year you have to pay tax on.
In most cases this will involve some form of disposal but it can simply be a change in your rights in relation to the asset.
S 104-5o Summary of CGT eventso The timing of a CGT event is also listed
S 102-25o Deals with when you have a few events that could apply to it.o Use the one most specific to the situation.o Use any other event other than D1 and H2. If both D1 and H2 apply, use D1, then H2 is
the last resort. Timing of the ‘CGT Event’ is important because:
o CGT only applies to CGT assets acquired on or after 20 Sep 85o Indexation and/or the discount only applies after you have held the CGT asset for more
than 12 monthso For indexation, the indexation factors depend on when the CGT asset was acquired and
when the CGT event occurred;o Market price on the date of acquisition or disposal may be required for calculating
either the cost base or the capital proceedso It will be determinative of the year the tax is attributable to
CGT Event A1 (s 104-10)o 104-10(1) Event happens when dispose of CGT asset.o 104-10(2) Disposal = change of beneficial ownership (e.g. sale or gift of CGT asset)o 104-10(3) Time of CGT event is when:
A contract for disposal is entered into, or The change of ownership occurs (if there is no contract)
o Must be a CGT asset under s 108-5(1)o 104-10(4):
Capital Gain=Capital Proceeds−Co st BaseCapital Loss=Reduced Cost Base−Capital Proceeds
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o 104-10(5) A capital gain or loss is disregarded if the CGT asset was acquired before 20 September 1985.
o Capital Proceeds General Rule
Sum of money and/or market value of property, which a taxpayer has received, or is entitled to receive, as a result of a CGT event (s 116-20(1)).
Does not include any GST charged where the CGT event is also a ‘taxable supply’ (s 116-20(5)).
Modifications Market value substitution rule
o Market value: Where you give something away and don’t receive anything in return
o Sections 116-40, 116-45, 116-50, 116-55 Apportionment rule Non-receipt rule Repaid rule Assumption of liability rule Misappropriation rule
o Cost Base Elements
1st element - amount you paid/required to pay (includes non-cash) (s 110-25(2))
2nd element – Incidental costs of acquisition or that relate to the CGT event (‘incidental costs’ are defined in s 110-35)
3rd element – Non-capital costs of ownership (incurred after 20 Aug 91) 4th element – capital expenditure incurred to increase or preserve the
asset’s value (except goodwill) 5th element – capital expenditure to establish, preserve or defend your
title to the asset If expenditure is deductible then it will not form part of cost base (S 110-45) Incidental costs (s 110-35)
Incidental costs apply both:o When the CGT asset is acquired and o When the CGT event (usually the disposal) occurs.
Both are added to the asset’s cost base They include:
o Costs of professional assistance (lawyer, accountant, valuer, broker, agent, surveyors etc.)
o Stamp dutyo Advertising costso Search feeso Costs of transfero Borrowing expenses
Reduced Cost Base Essentially, the same elements as in the ‘cost base’ (except for the third
element – ‘non-capital costs of ownership’)
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Less any amount you: o Have deducted (or could have deducted); oro Received as a recoupment; oro Been allowed a tax offset
Modifications Market value substitution rule Split, changed or merged assets rules Apportionment rules Assumption of liability rule
Capital Gains/Losses S 104-10(3): Time of CGT event is when:
o A contract for disposal is entered into, oro The change of ownership occurs (if there is no contract)o For time of acquisition see s 109-5o If it provides you with, the contract was entered into this year, and change occurred next
year, say the event occurred in the first. o If it is silent, say you assume there is a change of ownership in whichever year it is in.
Calculating CGT gain on the disposal of an asseto Three choices:
Indexation method (the cost base of the asset is indexed for inflation) Discount percentage method (tax is paid on the nominal gain reduced by an
allowed discount) No discount and no indexation (tax is paid on the nominal gain without any
discount.o Or all of them apply
Indexation and Discounting Time of acquiring and time of event before 21/9/99 (if event is A1)
o Can only use indexation Time of acquiring and time of event after 21/9/99 (if event is A1)
o Can only use discount. Acquired before and event (i.e. disposal/sale) occurs after 21/9/99
o Can use discount or indexation Indexation – Div 114
o Indexation only applies to assets acquired before 21/9/99o Index the cost base (other than the 3rd element) IF:
The asset was held for 12 months or more; There has been a capital gain and the event has cost base in its calculation; Choice to index has been made.
o You subtract the (indexed) cost base from the capital proceeds from the CGT event (usually a disposal of the asset).
o Indexation of a Cost Base Where the CGT asset was held for more than 12 months index each of the
elements of the cost base (see s 114-10) Indexation is calculated under subdivision 960-M Calculated by multiplying each element of cost base (except third) by the
‘indexation factor’ s 960-275:
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Indexation Factor= Index no . for quarter CGT event occurredIndex no . for quarter the expenditureinurred
Round to 3 decimal places (s 960-275(5)) Do not index the amount if its indexation factor is 1 or less (s 960-270(2)) Indexation Numbers:
Top number is always 68.7 because indexation was frozen at that time. Discount Capital Gains
o A ‘Discount Capital Gain’ is defined in s 115-5. Section 115-10 – only individuals, complying superannuation entities and trusts
can make discount capital gains. Section 115-15 – Discount capital gains only apply to CGT events happening
after 21 Sep 99. Section 115-20 – You do not index the cost base; Section 115-25 - Discount capital gains only apply to assets held for 12 months
or more. Section 115-25 - The CGT event must not be listed in s 115-25(3)) i.e. D1, D2,
D3, E9, F1, F2, F5, H2, J2, J5, J6, K10.o If an asset:
Has been owned for at least 12 months by An individual; A trust; or A complying superannuation entity;
Then any capital gain on disposal may be reduced by the CGT discounto Such gains are called ‘discount capital gains’.o You do not discount capital losses. o The reduction occurs at the end of the year when you calculate the taxpayer’s ‘net
capital gain’ from all ‘CGT Events’ occurring during that year (i.e. you do not apply the discount to individual capital transactions as they occur).
o Note there is a small business discount of 50% as well
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Net Capital Gains/Losses Essentially the sum of all current year capital gains, all current year capital losses and any carry
forward net capital loss from the previous tax year. Net Capital Gains – s 102-5
o S 102-5 Net Capital gain is part of assessable incomeo You add NCG to the rest of your assessable income for the year and pay tax on it at
your tax rate.o Basically, s 102-5:
Net Capital Gain=Capital Gain/ s−Capital Loss /es
o Step One:
Capital Gainsmade during income year−Capital Losses made duringincome year
o Step Two:
RemainingCapital Gains−NetCapital Loss ¿ previous years
Note: for both steps one and two, losses should first be offset against gains that do not attract a discount or indexation before gains that do.
o Step Three: If discount apply to any remaining gains reduce the gain by the discount percentage
o Step Four: If small business concessions apply to any remaining gains (whether or not they are discount capital gains) reduce the gain by the concessions.
o Step Five: The sum of any remaining gains after Step 4 is the taxpayer’s net capital gain for the year and is included in your assessable income.
Net Capital Losses – s 102-10o Basically:
Net Capital Loss=Capital Loss/es−Capital Gain /s
o Step 1: Add up all capital losses and all capital gains for that year.o Step 2: Subtract the capital gains from the capital losses.o Step 3: If the resulting amount is more that zero it is your net capital loss for the year.o S 102-10(2): Net Capital Loss not a deduction.o S 102-15: Net Capital Loss may be carried forward to reduce Capital Gains in future
years. Procedure for CGT Question
o Step 1: The Asset CGT ASSET (see s 108-5) - normal/ collectable (s 108-B)/ personal (s 108-C)?
At this step you may determine that the CG/L on this asset is disregarded.o Step 2: The Event
Identify the applicable CGT event (see s 104-5)o Step 3: The Time
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Identify the timing when acquired (see s 109-5) and when disposed (see corresponding sections listed s 104-5)
o Step 4: The concession Consider if the availability of Discounting/ Indexation
o Step 5: The CG/L To calculate the CG/L see the event provision. Repeat step 1 to 5 for each CGT asset and event.
o Step 6: Calculate NCG/L To calculate NCG/L see the methodology in s 102-5 or s 102-10.
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Week 8
Superannuation
What is Superannuation? ‘Regulated’ retirement savings scheme. What is the objective of Superannuation?
o Encourage taxpayers to privately save fore their retiremento Superannuation contributions are encouraged through the provisions of tax concessions
at the contribution, fund and benefit stage.
Superannuation Regulatory Scheme SFs are mainly regulated by:
o Superannuation Industry (Supervision) Act 1993 (‘SISA’) and o Superannuation Industry (Supervision) Regulations 1994 (‘SISR’)
Compliance with the SISA and related regulationso Generally one of the conditions for an entity to be considered as a ‘Complying
superannuation fund’ so to be entitled to all the tax benefits that follows. The Act And Regulations Are Administered By:
o The Australian Prudential Regulation Authority (APRA)o The Australian Securities and Investment Commission (ASIC)o The ATO (for self managed funds)
Tax Effective Form Of Saving For the following reasons:
o Contribution stage Deductions or tax offsets may be available
o Fund stage Complying superannuation funds are taxed concessionally
o Benefit stage Exempt from tax or generally taxed concessionally
However, to ensure that superannuation savings are used for funding retirement, restrictions are placed on a member’s ability to access such benefits.
Taxing Point 1 – When Contributions Are Made Contributions are made by
o The employero The employeeo A self-employed persono A third party (e.g. spouse)o Government
Contributions phaseo Deductions are generally available for:
Employer contributions to provide superannuation benefits for employees Personal contributions by substantially self-employed persons
o Tax offsets may be available for contributions for the benefit of low-income spouseso Government co-contributions are available for certain contributions made by low-
income earners
Deductions for employer – Subdivision 290-Bo S 290-60
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o Employers may deduct contributions made to a SF or RSA for the purpose of providing superannuation benefits for persons who are employees when the contributions are made.
Deduction for self employed – Subdivision 290-Co Sections 290-150 and 290-155o Self-employed and substantially self-employed persons may deduct contributions made
to a complying SF or RSA for the purpose of providing superannuation benefits to themselves.
Excess concessional contributionso S 292-20 ITAA97
A person has ‘excess concessional contributions’ in a year if their ‘concessional contributions’ exceed the ‘concessional contributions cap’ for the year.
o S 292-25 ITAA97 Concessional contributions are contributions made on behalf of/ by an
individual that is deductible to the contributor and included in the assessable income of the fund.
o S 292-20(2) ITAA97 The concessional contributions cap is $30,000 (for 15/16 indexed annually).
o Tax on excess concessional contributions Concessional contributions that exceed specified ‘contributions caps’ are
subjected to: Income tax
o The excess concessional contributions are included in the individual's assessable income and are taxed their marginal rate (s 291-15(a))
o The individual is entitled to a non-refundable tax offset 15% of the excess contribution (s 291-15(b))
o Excess concessional contributions charge is not deductible (s 26-74)
Excess concessional contribution charge (‘ECCC’)o ECCC is payable on the amount that their income tax liability
increased as a result of having the excess concessional contributions included as assessable income (s 95-10 Sch 1 TAA)
o ECCC is imposed at daily rate by reference to the 90-day bank accepted bill rate uplifted by 3 percentage points (s 95-15 Sch 1 TAA)
The individual may elect to have up to 85% of the excess released from super and no tax is payable on released amount (s 96-5 Sch 1 TAA).
Excess non-concessional contributionso S 292-90(1), (2), (4)o Non-concessional contributions comprise:
Contributions made to a complying superfund and are not included in the assessable income of the *superannuation provider in relation to the *superannuation plan; and
Non-deductible contributions included in the assessable income of the superfund Excess concessional contributions
o S 292-80 and s 292-85 ITAA97 A person is liable to pay ‘excess non-concessional contributions tax’ (‘ENCCT’)
if their ‘NON-concessional contributions’ exceed the ‘non-concessional contributions cap’ for the year.
ENCCT is not deductible (s 26-75)
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o S 292-85 ITAA97 2) The non-concessional contributions cap is $180,000 for 15/16 4) A ‘bring forward’ concessions allows persons under 65 to make up to
$540,000 in non-concessional contributions over three financial years without breaching the non-concessional contribution cap.
o Sections 4 & 5 Superannuation (Excess Non-Concessional Contributions Tax) Act 2007 Excess non-concessional contributions tax is imposed at the rate of 49% of the
person’s excess non-concessional contributions for the year. Division 293 15% tax on high income
o A person is liable to pay Div 293 tax if they have ‘taxable contributions’ for the income year (s293-15).
o Div 293 tax is not deductible (s 26-98)o A person has ‘taxable contributions’ where the sum of their ‘low tax contributions’
(generally concessional contributions) and ‘income for surcharge purposes’ exceed $300,000 (s 293-20)
o The tax does not apply to excess concessional contributions.
Taxing Point 2 – Taxation of Super Entities Special rules for the taxation of superannuation entities contained in Div 295 Complying Funds are generally taxed at 15%. Otherwise 47% Taxable income of complying superannuation entities is divided into:
o A ‘non-arm’s length component’ (taxed at 47%)o A ‘low tax component’ (taxed at 15%) (s 26(1), s 27(1), s27A Income Tax Rates Act
(1986) Assessable income may include earnings on the investment of amounts in a superannuation
plan and contributions that can be deducted by the contributor. Income from assets used to fund current pension liabilities is exempt income (s295-385, s295-
390)
Taxing Point 3 – When the Benefit is Paid1. What are its Component Parts?2. How are those parts taxed?
Superannuation benefits Superannuation benefits are defined in s 307-5(1).
o They include any of the payments in the table in that sub-section. o Payments that are not superannuation benefits are set out in detail in s 307-10.
Superannuation benefits can be paid as either:o A lump sum; or o An income stream.
They can also be paid as either:o Member benefits; oro Death benefits.
Tax Treatments Tax Treatment - from 2007-08 (1)
o A superannuation benefit, whether paid as a lump sum or an income stream, consists of 2 components (s 307-120):
o A ‘tax free component’ (s 307-210) The ‘contributions segment’ (undeducted contributions/ not assessable income
to the fund)
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The ‘crystallised segment’ (relates to the pre-1 July 83 component); The tax-free component is non-assessable, non-exempt income so is not taxable
– whoever receives it and in whatever form (lump sum or income stream).o A ‘taxable component’ (s 307-275)
The taxable component is all of the superannuation benefit less the tax free component (s 307-215).
An ‘element taxed in the fund’ (most common) An ‘element untaxed in the fund’ (15% tax had not been paid when
contributions were made). Tax Treatment for Age 60 Plus
o See tables in ATL pages 1208 and 1210 for ‘Age 60 and over’.o A superannuation benefit paid from the taxable component to those over 60:
From an element taxed in the fund is non-assessable, non-exempt (whether paid in a lump sum or an income stream) (s 301-10);
From an element untaxed in the fund, As a lump sum is taxed at no more than 15% up to the untaxed cap
amount (($1m – indexed; $1.395m in 15/16); the top marginal rate applies thereafter (s 301-95).
As an income stream is taxed at marginal rates but with a 10% tax offset (s 301-100).
Tax Treatment for Preservation Age to 59o See tables ATL pages 1208 and 1210 for ‘Preservation age to age 59’o A superannuation benefit paid from a taxable component to those over preservation age
but below 60: From an element taxed in the fund,
As a lump sum is taxed at 0% up to the low rate cap ($140K indexed; $195K in 15/16) and at 15% thereafter (s 301-20); and
As an income stream it is taxed at marginal tax rates but with a 15% tax offset (s 301-25).
From an element untaxed in the fund, As a lump sum is taxed at 15% up to the low cap amount ($140K
indexed; $195K in 15/16); then at 30% up to the untaxed plan cap ($1.395m in 15/16); the top marginal rate applies thereafter (s 301-105).
As an income stream it is taxed at marginal rates and with no offset (s 301-110).
Tax Treatment for Below Preservation Ageo See table ATL 1,208 and 1,210 for ‘Below preservation age’o A superannuation benefit paid from a taxable component to those under preservation
age: From an element taxed in the fund,
As a lump is taxed no more than a rate of 20% (s 301-35). As an income stream is taxed at marginal tax rates and with no offset
unless as a disability income stream the member will receive 15% offset(s 301-40).
From an element untaxed in the fund, As a lump sum is taxed at no more than 30% (up to the untaxed plan cap
of $1.395m in 15/16) and the top marginal rate applies thereafter (s 301-115).
As an income stream is taxed at marginal rates and with no offset (s 301-120).
Superannuation Death Benefits – from 2007-08: Div 302o To dependents
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If your benefit goes to ‘dependent’ and it is paid as a lump sum, it is non-assessable, non-exempt income in their hands (s 302-60).
If it is paid as an income stream from an element taxed in the fund and The deceased or the dependent was age 60 or more at the time of death
then non-assessable non-exempt (s 302-65) The deceased and the dependent were under age 60 then will be taxed at
marginal rates but will be entitled to a 15% tax offset (s 302-75) If it is paid as an income stream from an element untaxed in the fund and
The deceased or the dependent was age 60 or more at the time of death then will be taxed at marginal rates but will be entitled to a 10% tax offset (s 302-85)
The deceased and the dependent were under age 60 then will be taxed at marginal rates (s 302-90)
o To non-dependents It cannot be paid to a non-dependent as an income stream If it goes to other than a dependent and it is paid as a lump sum the ‘taxed
element’ is taxed at 15% and the ‘untaxed element’ is taxed at 30% (s 302-145). However if it is paid, the ‘tax free component’ of a death benefit is always tax
free (s 302-140).
Termination Payments
Definition Employment termination payments (ETPs) made by the employer and received in consequence
of the termination of employment of a person (s 82-130). An ETP does not include superannuation benefits, pensions, annuities, unused annual leave and
long service leave and the tax-free part of genuine redundancy or early retirement scheme payments (s 82-135).
Termination Payments (ETPs) They can take the form of either (s 82-130(1)(a)):
o A ‘life benefit termination payment’; or
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o A ‘death benefit termination payment’ An ETP received by the employee is called a ‘life benefit termination payment’ (LBTP) An ETP received by another person after the death if the employee is called a ‘death benefit
termination payment’ (DBTP) Both LBTPs and DBTPs may consists of:
o The tax free component: The invalidity segment of the employment termination payment; and The pre-July 83 segment of the payment (s 82-140). The tax-free component is non-assessable non-exempt income (ss 82-10(1), 82-
65(1), 82-70(1)).o The taxable component (s 82-145)
The taxable component is the amount of the ETP minus the tax-free component (s 82-145).
Taxable component of a LBTP An ETP received by the employee is called a ‘life benefit termination payment’ (LBTP) Taxable component is assessable income (s 82-10(2)) If the taxpayer has reached their preservation age amounts up to $195K in 15/16 is taxed at no
more than 15% and the remainder taxed at a rate of 45% Otherwise amounts up to $195K in 15/16 is taxed at no more than 30% and the remainder taxed
at a rate of 45% (ss 82-10(3)(4)).
Taxable component of a DBTP An ETP received by another person after the death if the employee is called a ‘death benefit
termination payment’ (DBTP)o Taxable component is assessable income.o Paid to dependant amounts up to the ETP cap ($195K 15/16) is non-assessable non-
exempt income and remainder is assessable income taxed at 45% (s 82-65)o Paid to non-dependant amounts up to the ETP cap ($195K 15/16) is assessable income
and a tax offsets ensures that the rate of tax is no more than 30% and the remainder taxed at 45% (s 82-65).
Tax Treatment of Redundancy and Early Retirement Scheme Payments Genuine redundancy payment is made in consequence of the dismissal of the employee because
their position is genuinely redundant (s 83-175). An early retirement scheme payment is made to an employee whose employment is terminated
under a scheme approved by the Commissioner for the reorganisation of the employer’s operations (s 83-180).
Tax Treatment of Redundancy and Early Retirement Scheme Payments Section 83-170(2): an amount – calculated under s 83-170(3) - is tax free (it is non-assessable,
non-exempt income). The tax-free amount is calculated using the formula:
Tax Free Amount=Base Amount+(Service Amount × Years of Service)
o Base amount is $6,783 – indexed annually from 06/07 ($9,780 in 15/16)o Service amount is $3,392 – indexed annually from 06/07 ($4,891 in 15/16 )o Years of Service is whole years of service.
Any balance (the ‘assessable amount’) is taxed under the ‘normal’ employment termination payment rules.
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Tax Treatment of LSL Payments: (ss 83-65 to 83-115)o 5% of the amount attributable to unused LSL accrued before 16 Aug 1978 is assessable and
taxed at taxpayer's marginal rates.o All of the amount attributable to untaken LSL accrued between 16 Aug 1978 and 17 Aug 1993
(inclusive) is assessable and taxed at a rate not exceeding 30% (s83-85). o All of the amount attributable to unused LSL accrued on or after 18 Aug 1993 is assessable and
taxed at the taxpayer's marginal rates.
Fringe Benefits
Fringe Benefits Commenced on 1 July 1986. To a large extent replaced s 26(e) ITAA 1936 which was seen as
ineffective. The legislation is the Fringe Benefits Tax Assessment Act 1986 (FBTAA). FBT tax year is 1 April – 31 March. FBT rate is a flat 47% (14/15) and 49% (15/16) A fringe benefit is a benefit provided by an employer to an employee in respect of the
employment Section 23L(1) ITAA36 makes fringe benefits non-assessable non-exempt income in the
employee’s hands Fringe benefits are taxed in the employer’s hands Tax is payable on the ‘fringe benefits taxable amount’ (a grossed up version of the ‘value of the
fringe benefit”) There are 13 types of non-salary employment benefits, all valued differently FBT is a loss or outgoing incurred by the employer in gaining or producing assessable income
– so is deductible to the employer
Taxing Fringe Benefits1. Determine whether the benefit is a taxable ‘fringe benefit’ under s 136(1).2. Work out the ‘value of the fringe benefit’ (under sub-div B of the relevant division of Part III
of the FBTAA)3. Calculate the ‘fringe benefits taxable amount’ (Part IIA – especially s 5B).4. Calculate the FBT payable on the ‘fringe benefits taxable amount’.
Fringe Benefit’ definition – s 136(1) FBTAA A taxable fringe benefit arises where a benefit is provided to an employee by an employer in
respect of the employment of the employee ‘Employee’ includes an associate of the employee ‘Employer’ includes an associate of the employer and a third party under an arrangement with
the employer or the associate ‘In respect of employment’: the benefit must be a product, incident or consequence of the
employment relationshipo Does not cease to be ‘in respect of employment merely because the benefit was:
Also provided for another reason In respect of current, past or future employment Surplus to the needs of the employee Also provided to another person Offset by inconvenience (s 148)
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o Exempt employers Religious bodies International bodies Public benevolent institutions
Exempt benefits Exemptions can be found in:
o The definition of ‘fringe benefit’ [s 136(1)] – excludes salary and wages; superannuation contribution; exempt benefits.
Specific exemptions (exempt benefits) The particular ‘type of benefits’ provisions itself See Div 13, sections 53 to 58Z
o Provision of child care; a laptop computer; a mobile phone; minor benefits
Miscellaneous Div 14o The first $1,000 of ‘in-house’ fringe benefits (s 62).
Liability to pay FBT S 66 FBTAA; s 6 Fringe Benefits Tax Act 1986:
Fringe BenefitsTax=Fringe BenefitsTaxable Amount × 49%
FBT and the cost of benefits provided are both generally deductible under s 8-1 ITAA97
Fringe Benefits Taxable Amount 2014/ 2015: Fringe benefits taxable amount = [ type 1 aggregate fringe benefits amounts x
2.0802 ] + [ type 2 aggregate fringe benefits amount x 1.8868 ] + aggregate non-exempt amount
2015/2016: Fringe benefits taxable income = [ type 1 aggregate fringe benefits amount x 2.1463 ] + [ type 2 aggregate fringe benefits amounts x 1.9608 ] = aggregate non-exempt amount.
Procedure to Calculateo Step 1
Calculate the taxable value of each fringe benefito Step 2
Divide benefits into ‘GST-creditable’ (type 1) and ‘other’ (type 2)o Step 3
For 2014/15 multiply type 1 benefits by 2.0802 and type 2 benefits by 1.8868 For 2015/16 multiply type 1 benefits by 2.1463 and type 2 benefits by 1.9608
o Step 4: Add up these and the employer’s aggregate non-exempt amount
Gross Up Factor Aims to achieve equitable tax treatment between fringe benefits and cash salary for employees
on the top marginal rate of income tax. As income tax is calculated on the gross salary, the gross-up allows FBT to be applied to the
gross value of the benefit. It reflects the gross salary employees would have to earn at the highest marginal rate (including
Medicare levy) to buy the benefit after paying tax. (1) For benefits which allow the employer to obtain an input tax credit (under GST) (Type 1
aggregate fringe benefit amount):
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FBT Rate+GST Rate(1−FBT Rate ) × (1+GST Rate ) × FBT Rate
o 2014/ 15 Equals gross-up rate of 2.0802o 2015/ 16 Equals gross-up rate of 2.1463
(2) Type 2 aggregate fringe benefit amounts (basically not included in Type 1):
1(1−FBT Rate)
o 2014/15 Equals gross-up rate of 1.8868o 2015/16 Equals gross-up rate of 1.9608
Benefits Covered The Act identifies 12 specific benefits and provides a valuation method for each. A 13th category [‘residual’ fringe benefits] covers all benefits not covered in the 12 specific
categories. It has its own valuation method. Identification of the correct benefit is vital because of the unique valuation method that applies
to each.
Reduction at Taxable Value Two major reduction factors, which reduce the taxable value of the fringe benefit:
o Any contribution of the employee – this clearly reduces the value of the benefit to the employee.
o The otherwise deductible rule.
Otherwise deductible rule Reduces the taxable value by an amount which equals the tax deduction the employee would
have obtained if (hypothetically) he/she had expended his/her own money on the benefit and was not reimbursed by the employer.
It ensures that only the employee’s private use of the benefit is taxed. Only applies:
o To loan, expense payment, airline transport, board, property and residual benefits.o Where the benefit is provided to an actual employee (not an associate).o When the hypothetical deduction is a once-only deduction (a deduction for depreciation
is not ‘once-only’).o Where the employee provides a declaration to the employer about the extent of the
deductibility that otherwise would have been available.
Debt Waiver Fringe Benefit Arises where a provider waives the obligation of the recipient to pay or repay an amount owing
to the provider (ss 14, 136(1)) The taxable value is the amount the payment or repayment of which is waived (s 15).
Loan Fringe Benefit Arises where an employer makes a loan to an employee and charges interest less than the
interest calculated using a statutory ‘benchmark rate’ [6.45% for 13/14; 5.95% for 14/15 and 5.65% for 15/16; ] (ss 16, 136(1))
The taxable value is the difference between the interest on the loan that would have accrued during the tax year had the benchmark rate applied and the interest, if any, actually accruing.
The taxable value may be reduced where the employee (not an associate) uses all or part of the loan for income producing purposes (the otherwise deductible rule).
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Week 9
Partnerships
What is a Partnership?
Partnerships under the Partnership Act Partnerships are not legal entities. Partnerships involve a statutory agency. Partners operate a business in common with a view to profit. Profits/losses only accrue to the partners when the accounts are taken. Until then the money received is partnership property. The individual partners’ shares depend on:
o What is specified in the agreement; oro An equal share under the Partnership Act.
‘Drawings’ are advances against the ultimate distribution of profit. Contributions to capital become partnership property and interest is not normally paid. Partners can lend money to the partnership and interest can be paid.
Definition – S 5 Partnership Act (1) Partnership is the relation which subsists between persons carrying on a business in
common with a view of profit. (1A) Partnership includes an incorporated limited partnership. (2) However, the relation between members of any company or association that is--
(a) Incorporated under the Corporations Act; or (b) Formed or incorporated by or in pursuance of any other Act of Parliament or letters patent, or Royal Charter;
Is not a partnership within the meaning of this Act.
Definition – S 995-1 ITAA 97 (a) An association of persons (other than a company or a limited partnership) carrying on
business as partners or in receipt of ordinary income or statutory income jointly; or (b) A limited partnership. Effects of this section:
o Restates the Partnership Act definition;o Extends the concept to include people who receive income jointly; ando Excludes companies (but not limited partnerships)
Case Z7 Husband and wife had a joint bank account Money was paid to that account Wife argued that she was entitled to partnership income for interest obtained by that bank
account Was found that she had access to the account, but she was not a partner
Macdonald Sharing profit or loss will be dictated by the sharing percentage of the property in question Also Cripps, Tax Ruling 93-432
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How Partnership Income is Taxed
Partnerships are liable to furnish an income tax return, but not to pay tax (ITAA36 s 91). Instead, the net income of the partnership, partnership loss, exempt income, and non-assessable non-exempt income are calculated and the individual interests of the partners are accounted for (ITAA36 ss 90, 92), from which the partners make declarations on their individual tax returns.
Step 1o Considers s 90o Calculate the ‘net income’ of the partnership OR the ‘partnership loss’ as if the
partnership was a resident individual. Step 2
o Considers s 92o Calculate each partner’s share of that ‘net income’ or ‘partnership loss’ and include it in
his or her personal taxable income.o At the partner level is when residency is considered
Step 1 ‘Net Income’ and ‘Partnership Loss’ s 90
o Note three things: They are calculated in basically the same way as income or loss is calculated
generally. For the purpose of determining the ‘net income’ or ‘partnership loss’ the
partnership is treated as if it were a resident. Certain deductions are specifically excluded from the calculation.
Deductionso Generally, the same rules apply to deductions by a partnership as apply to deductions by
any other taxpayer.o One important exception is in s 26-35(1) – Payments to related entities are only
deductible to the extent that the Commissioner considers them ‘reasonable’. The reasonable amount will be part of the party’s assessable income, any excess is not assessable income, nor is deductable for the partnership s 26-35(3)
Who is a related entity? Anybody who is related to a partner in the partnership
Intra Partnership Payments and Receiptso Intra-partnership payments and receipts are regarded as ‘an internal allocation of profit
shares’o Therefore, are neither assessable nor deductible to the partnership.o Should be excluded from Step 1o Examples
Salaries paid to partners will not be ordinary income s 6-5 or deduction 8-1 Ellis v Ellis
Drawings by the partners Considered a payment on account of each partner’s share of profit Have to be reconciled against ultimate distribution
Interest paid to partners on capital contributions Meaning this is not under ss 6-5 or 8-1
Interest paid by partners on over-drawings FCT v Beville
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o In contrast, interest paid to partners on their loans is not considered an intra partnership payment, and therefore is 6-5 ordinary income for the partner, and the partnership can claim an 8-1 deduction.
Lenoard v FCT
Step 2 – Calculate Each Partner’s Share The share taken by each partner will depend on what is specified in the partnership agreement Under the Partnership Act, if the partnership agreement is silent the partners share profits and
losses equally. If there is a specified amount, but there is remainder on which the partnership agreement is
silent, the remainder will be split equally Residency
o Australian residents are taxable on worldwide income.o Non-residents are taxable on Australian source income.o That basis of assessability is maintained with income derived through partnerships. o If there is part year, then there is two components
One for the part in which they were a resident in which the worldwide income is taxed
One for the part in which they were a non-resident in which they are taxed on Australian sourced income
o Partnership agreement can have non-resident partners receive non-Australian source income first, so they pay less tax
Section 92o (1) The assessable income of a partner in a partnership shall include:
(a) So much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident; and
(b) So much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was not a resident and is also attributable to sources in Australia.
o (2) A partnership loss is allowable as a deduction to a partner (a) So much of the individual interest of the partner in the partnership loss as is
attributable to a period when the partner was a resident; and (b) So much of the individual interest of the partner in the partnership loss as is
attributable to a period when the partner was not a resident and is also attributable to sources in Australia.
Assignments Assignments and Tax Planning
o Partners derive their shares of the partnership’s net income when the obligation to take partnership accounts arises at law.
o Therefore an assignment at any time before accounts are taken can alienate a share of partnership net income.
o See FCT v Everett (1980) 134 CLR 440 Everett assigned a share in his interest in the partnership to his wife This created a trust where Everett became the trustee of the share and his wife
became the beneficiaryo Galland
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The solicitor partner assigned 49% of his share in the partnership to the family trust
The High Court followed Everett and said this was effective to alienate the entire share for the whole year
Assignments and CGTo CGT applies to any assignment of an interest in a partnership acquired after 19
September 1985o Everett assignments are therefore unlikely to be attractive when the partnership interest
was acquired post-CGTo Consider arm’s length value of a share s 116-30, cost-base value of the share
Dissolution of Partnerships
Partnerships generally dissolve by: Agreement between the partners; or Changes in the firm's constitution through:
o The introduction of a new partner;o The retirement of a partner; oro The death of a partner.
FCT v Happo The taxpayer members of a four person partnership had a disagreement, and two
members wished to leaveo The agreement to dissolve was written up, which purported that the partnership ended
six months earlier than it effectively dido The court held that the partnership ended when it effectively happened, not at the time
the agreement stated
When a partnership is dissolved Disposal of CGT assets
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Week 10
Taxation of Trusts
What is a Trust? A trust exists where one person (the trustee) has the legal or equitable ownership of property
while another (the beneficiary) has the beneficial interest in it and/or its proceeds. The beneficial interest may consist of an interest in the income and/or the corpus (trust assets). People
o Settlor – the person who creates the trust, and divests property absolutely to the trustee by transferring legal title to the trustee. If they retain the right to dissolve the trust, they may be subject to higher tax. May be intervibos settlement – where the settlor is still alive. No particular requirement to create a trust, but must be writing in relation to property. Usually there will be a trustee, mere declaration (usually with a bank account) or by order of the court. Resulting trust where the original trust fails, until the settlor sorts it out.
o Trustee – may be an individual, but could select a corporate trustee. A corporate trustee is protected against liability. Legal owner of the asset. The asset can be money and/or property and/or a business itself. Must apply the corpus for the benefit of the beneficiary. The beneficiary may be entitled to a share in the income and/or the corpus.
o Beneficiary – entitled to a share of income and/or corpus. May be fixed into the deed, or it may be discretionary. Note discretionary is better for tax planning. If it’s discretionary, can have individual listed, or group of individuals identified, and the trustee can give an amount they think is appropriate. They would receive the corpus once it vests. The trust deed or declaration will state when it will vest. Remainder man is the person who is entitled to the corpus at the time of vesting.
Features of a trust1. A trust is not a legal entity.2. The transfer or corpus from settlor to trustee is a transfer of capital (and constitutes a ‘CGT
event’ under s 104-55(1)).3. The income of the trust is income in someone’s hands and must be taxed.4. Trust losses are not distributed but are carried forward in the trust and offset against future
years’ income.
Outline of Taxation of a Trust Trustee is liable to lodge a tax return Step 1: Calculate the ‘net income’ of the trust estate. Step 2: Determine who is liable to pay tax on the income and at what rates:
o Determine whether there are beneficiaries who are ‘presently entitled’ to a share of that income
o Determine whether those beneficiaries are under a ‘legal disability’ and, if so, whether they derive income from any other source
o Consider the resident status of any presently entitled beneficiary.
Step 1: Calculate net income of the trust estate – div 6, s 95 ITAA36 ‘Net income’ is calculated in the same way as taxable income is for an individual (ie it equals
assessable income – allowable deductions);o Different between net income and trust income
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Bamford In trust law, the income is the flow and if you sell in capital it would not be
income If the trust derives rental income, and dispose of an asset and make income from
that, the trust income would mean the rent would be trust and the capital gain would not be trust income
The tax trust income is in accordance with the trust law and can include capital Assessable income is calculated as if the trustee was a resident individual; There are TWO exclusions from allowable deductions:
o Farm Management Deposits under Div 394; ando Carry forward losses in respect of any beneficiary who has no beneficial interest in the
corpus and any life tenant where losses are met out of corpus. Carry forward losses
o Tax losses are not distributed to beneficiaries.o They are held in the trust and carried forward to be offset against future trust income.o The rules are the same Div 36 rules for carry forward losses generally.o Consequently, any carry forward losses are set off against exempt income before being
offset against assessable income.o The definition of net income in s 95 can have the effect of providing different net
incomes for different beneficiaries.o This is because the object of that definition is to ensure that beneficiaries who do not
bear the effect of any past loss (because they do not share in the corpus) do not get a tax benefit from the loss.
Step 2: Who pays tax on the trust income and at what rates? Determine who is entitled to the income. This depends on two things:
o Whether the trust gives the beneficiary a present entitlement (or whether anything else does – the Act, the Courts etc)
o Whether the beneficiary is under a legal disability so that he/she cannot enforce any entitlement he/she may have.
What is present entitlement?o A person is ‘presently entitled’ to a share of trust income if he/she has an absolute and
indefeasible vested interest (meaning the interest has arisen) in possession in income that is legally (in trust law) ready for distribution (even though it may not be in the hands of the trustee); and either,
Has an immediate right to demand payment; Would have that right but for a legal disability;
Whiting Taylor Vegner
o A taxpayer can also be presently entitled to a share even though they might not be aware they are entitled to it
Shacks Gildiger
Can direct the trustee to reinvest, accumulate, capitalise etc. that share of the income.
o Two main extensions
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S 95A(2) deems a beneficiary to be presently entitled to a share of trust income where he/she has a vested and indefeasible interest in that income – even if he/she is not (in law) presently entitled to it.
Dwighto Non-resident company paid money into a court as security
against a potential judgment of costso Were paid into an account of an individual solicitor acting to the
partieso Court assessed the solicitors as trustees with the maximum
penaltieso Held that the funds of the non-resident company were vested and
indefeasible, and therefore were presently entitled to it under s 95A(2)
S 101, discretionary trusts - where the trustee has a discretion to pay or to apply income to or for the benefit of specified beneficiaries AND exercises that discretion.
Legal disability A person is under a legal disability if they cannot give a valid discharge for payments he/she
receives. Such people include:o Minorso Those of unsound mindo Bankrupts
Three possibilities for entitlement for incomeo Beneficiary presently entitled and NOT under a legal disability.o Beneficiary presently entitled but under a legal disability:
Deriving no income from other sources; Deriving income from other sources.
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o No beneficiary is presently entitled.Presently Entitled and Non-Resident at the end of income year
The trustee is assessed and pays the tax - s 98(2A) and (3); The beneficiary is also assessed and pays the tax – s 98A(1); BUT The beneficiary gets a deduction against the assessed tax for the tax paid by the trustee - s
98A(2).
Where Presently Entitled Beneficiaries under a Legal Disability Derive Income From Other Sources – s 100
S 100(1) - the beneficiary's assessable income shall ALSO include his/her individual interest in all trust estates as assessed to the trustees under s 98 AND/OR the other income.
S 100(2) - the tax to which the beneficiary is assessed is reduced by the amount of tax paid or payable by the trustees.
Taxation of Minors – Div 6AA Div 6AA is intended to discourage income splitting with minor children. Penalty tax rates on eligible taxable income (unearned income) is according to Income Tax
Rates Act 1986 (Cth) ss 13 and 15, schedule 11 It effectively imposes a 47% tax rate on the unearned income of persons under 18 at the end of
the tax year. It does not apply to ‘excepted persons’ – defined in s 102AC(2).
o E.g. A 15-17 year old who has left school and is working full time It does not apply to ‘excepted assessable income’ – s 102AE(1) and (2). When a beneficiary is a ‘prescribed person’ Div 6AA applies to so much of the beneficiary’s
share of the net income of the trust estate as in the Commissioner’s view is attributable to assessable income that is not ‘excepted trust income’ – s 102AG(1).
S13; Sch 11 o If the eligible taxable income is $416 or less – it is tax-free.o If the eligible taxable income is greater than $416 but up to $1,445 the tax is (generally)
68% of the excess over $416.o If the eligible taxable income is greater than $1,446 tax is payable at 47% on the whole
of the eligible taxable income. What is the low income tax offset?
o See s 159No With taxable income up to 37,000 the offset is $445.o With taxable income between 37,001 and 66,666 the offset is($445 – 0.015*(taxable
income – 37,000)o Minors cannot use the low income tax offset under s 159N to reduce the tax payable on
unearned income. o Trust distributions may therefore be taxed at an effective tax rate of 47% (if they exceed
$1,446).
Where there are no presently entitled beneficiaries The trustee is assessed at the top rate (47%) under s 99A(4), (4A), (4B) or (4C)
o Unless 99A(2) makes s 99A inapplicable. If s 99A(2) makes s 99A inapplicable, then s 99 applies; and,
o The trustee is assessed (‘as if the income were the income of an individual without deductions’) under s 99(2), (3), (4) or (5).
o Rates are either:
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Where net income is from a trust estate of a person who died less than 3 years at normal MRT, except top rate is 47%
Otherwise see ITRA s12; 14; sch 10 or ATL pages 68-70
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Anti Tax Avoidance Measures S 102 – Revocable Trusts
o Where a settlor creates a trust but:a. He has power to revoke or alter the trust to acquire a beneficial interest in all or
any part of the income and/or corpus for himself; orb. The income of the trust is payable to a child of that person under the age of 18
yearso The Commissioner may assess the trustee to tax at the settlor’s marginal tax rates.
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Week 11
Taxation of Companies
Nature of a company Companies are ‘opaque’ entities. S 995-1 – ‘person includes a company’. S 6(3) – ‘The express references in this Act to companies do not imply that references to
persons do not include references to companies’. S 995-1 – ‘company means:
o (a) A body corporate; oro (b) Any other unincorporated association or body of persons;o But does not include a partnership or a non-entity joint venture.’
Public and Private Companies S 103A ITAA36 – For taxation purposes, companies in Australia are also divided into:
o Public companies; ando Private companies
Private companies (usually small closely held companies) are subject to a number of additional restrictions to prevent tax avoidance.
Private companyo S 103A(1) – if it is not a public companyo Can be private if there are 20 people or less who hold more than 75%
Public companyo S 103A(2) – Threshold testo S 103A(2)(a) or (b) see the 20/75 rule s 103A(3)o S 103A(2)(d)(v) see s 103A(4) or s 103A(4B)o Note: Commissioner’s discretion - treated as public company s 103A(5)
Particularly when a company acquires a new company
Taxation Companies are taxed at a flat rate of 30% Companies that are SBEs are taxed at a flat rate of 28.5% They generally pay tax in quarterly instalments (though some ‘small entities’ may make one
‘annual payment’); They are not entitled to the tax-free threshold; They cannot claim the personal tax offsets; Their ability to deduct carry-forward losses and bad debt write- offs is restricted; Companies are not subject to Div 900 (substantiation); Company groups can ‘consolidate’ for taxation purposes; Their dividend income is treated a little differently under imputation.
Determining Taxable Income Taxable income = Assessable income – Deductions Differences with companies:
o Residence;o Deductions for carry forward losses and bad debt write-offs;o Dividend distributions;o Treatment of dividend income they receive.
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Residenceo A company will be a resident of Australia if it:
Is incorporated in Australia; or Carries on business in Australia and has its central management and control in
Australia; or Carries on business in Australia and has its voting power controlled by
shareholders who are Australian residentso First question: Was the company incorporated in Australia?
If yes, it is an Australian resident for taxation purposeso Second question: If the company was not incorporated in Australia, does that company
carry on business in Australia? If it does not, it is not a resident If it does, it will be a resident if either:
Its central management is in Australia Its voting power is controlled by Australian residents
A company will ‘carry on business’ if: It physically carries on business in Australia; or Its operations (wherever situated) are ‘controlled and directed’ from
Australia. Central management and control occurs where the enforceable decisions of the
company are made. Malayan Shipping Co Ltd v FCT
o Company was incorporated in Singaporeo All shares but for two were owned by a person lives in
Melbourneo The other two were held by a Singapore director on trust for the
person in Melbourneo The central management was located in Singapore, but all
decisions were made by the man in Melbourneo The court held that central management of control was the
location of the actual decision making, not the place the documents were formally executed
o If you have a business with central management in Australia, you are carrying on business in Australia
Esquire Nominees Ltd v FCTo Directors complied with wishes of accountantso Court held that central management controls were not with the
accountantso The directors were only getting adviceo Advice is different from control
Deductionso S 8-1 general deductionso Div 12 Particular kinds of deductionso Div 36
Companies wanting to deduct carry forward losses or bad debt write-offs must not only satisfy the requirements in Div 36 and s 25-35 (respectively);
They must also satisfy the ‘same owners’ test or the ‘same business’ test under Div 165 – see ss 165-10, 165-12, 165-13.
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Dividendso Companies cannot claim deductions for payment of dividendso A dividend includes (s 6(1) ITAA36):
A ‘distribution’ made by a company to its shareholders, and Any amount ‘credited’ by a company to its shareholders as shareholders
o A dividend does not include: Amounts debited against the company’s ‘share capital account’ Certain monies for the redemption or cancellation of redeemable preference
shares Deemed Dividends
o Loans by private companies to their shareholders and their associates; ando Excessive payments by private companies to their shareholders, directors and/or
associates of shareholders or directors. Distribution to Shareholders and Associates – Div 7A
o Applies to private companieso 3 types of deemed dividends
Amounts paid to shareholders/associates Amounts lent to shareholder/associates Amount of debts owed by shareholder/associates forgiven by the company
o Excessive Payments to Shareholders, Directors and Associates – s 109 Like Div 7A payments, s 109 applies only to payments made by private
companies. S 109(1) applies only where the amounts of such a payments is excessive - in
the Commissioner's opinion. The deduction allowable to the company is reduced to an amount, which the
Commissioner considers reasonable. The excess is deemed to be a dividend payable by the company out of the profits
of the company on the last day of the relevant year of income. o Distribution under Division 7A
Payments to shareholder/ associates (s 109C(1)) Payment/s to a shareholder/ associate or former and a reasonable person
would conclude that the payment/s is made for reasons they had been a shareholder/ associate.
Loans to associates (s 109D(1)) Loans by private companies to shareholders or their associates are
generally deemed to be dividends if not repaid by the time the company lodges its tax return.
Forgiven debts (s 109F(1)) A debt that is owed by a shareholder/ associate or former and a
reasonable person would conclude that the debt is forgiven for reasons they had been a shareholder/associate.
See s 109G for exceptions.o Loans by Private Companies to Shareholders/ Associates – Div 7A
What is a loan? Loans are not caught by Div 7A if according to a 109N they:
Are in writing Meet ‘benchmark interest rate’ (2015/16 5.45%), and Meet maximum term requirements (7 or 25 years)
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S 109M they: o Are made in the ordinary course of the private company’s
business; ando On the usual terms on which the company makes similar loans at
arm’s length. Taxation of Dividends Received by a Company
o Resident companies may eliminate or reduce their liability to tax on the dividends they receive by using either:
The consolidations regime; and/or The imputation rules.
Imputation What was the classical system of taxing dividends? What is the imputation system? Taxation of dividends Franking accounts
What is the imputation system? Companies receiving franked dividends from other companies (those not in their consolidated
group) can use the imputation rules to limit or even entirely eliminate the tax liability on those dividends – just like any other taxpayer.
Designed to prevent double taxation of profits
Taxation of Dividends Resident shareholders (s 44(1)(a))
o Required to include all dividends received in assessable income regardless of source. Non-resident shareholders (s 44(1)(b))
o Required to include in assessable income dividends paid by a company to the extent that the dividends are paid out of profits derived by the company in Australia.
o Except dividends paid by resident companies to non-residents are generally non-assessable non-exempt income (s 128D)
The Shareholder Dividend is assessable income (s 44(1)); and Assessable income is gross-up to include franking credits (s207-20(1); (so that the relevant tax
can determined); and Franking tax offset is available to tax into account tax had been paid by the company (s 207-
20(2)). Where there is excess franking credits see Div 67
Refundable tax offsets Div 67 Any excess franking credits that are not offset against their income tax liabilities for a
particular year are refundable for resident individuals and complying superannuation entities Refunds not available for non-complying superannuation entities, and generally not available
for companies Companies may convert their ‘excess franking offsets’ into equivalent tax loss amounts (s 36-
55).
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Non-Residents and Imputation Non-residents do not use the imputation system either to gross up or to claim an offset. Non-residents are taxed on their Australian source dividend income by withholding tax under s
128B - (normally at a maximum rate of 30%). Under s 128B(3)(ga)(i) they pay no withholding tax on their dividend income - to the extent to
which it is franked.
Company Requirements for Imputation Australian company is required to maintain a franking account for the purpose of keeping track
of income tax paid so that it can determine how much franking credits it can pass on to its shareholders (s 200-15);
Operates as a running balance of the franking credits available. Circumstances in which tax entities generate franking:
Credits – set out in s 205-15o Pay income tax or PAYG instalment, o Receive franked distributions directly from another corporate tax entity o Receive franked distribution indirectly from a partnership or trusto The entity incurs a liability to pay ‘franking deficit tax’.
Debits – set out in s 205-30o Pay franked distributions, o Receives a refund of income tax, and o Entity under-franks a distribution.
The company uses the franking credits to ‘frank’ its dividend – ss 205-5(3) and 205-30. The amount of the franking credit is determined under Div 202; For the shareholder:
o Dividend is assessable income (s 44(1)); and o Assessable income is gross-up to include franking credits (s 207-20(1); o (So that the relevant tax can determined); ando Franking tax offset is available (s 207-20(2)).
The company uses the franking credits to ‘frank’ its dividend – ss 205-5(3) and 205-30; The amount of the franking credit is determined under Div 202. The maximum amount of franking credits that can be allocated to the dividend: (s 202-60)
Maximum Franking Credit=Amount of Frankable Distribution × 3070
FrankingCredit=Frankable Distribution× 3070
× Franking%
What is frankable distribution?o See s 202-40 and 202-45
Benchmark Rule Company must not make a frankable distribution if ‘franking percentage’ differs from its
‘benchmark franking percentage’ for the ‘franking period’ in which the distribution occurs. Exceptions to this rule:
o S 203-20 Limited exceptions for listed public companies/ 100% subsidiary of o Commissioner’s discretion s 203-55
Ask:o What is the 'benchmark franking percentage'?
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o What is the 'franking percentage'?o What is the 'franking period'?
Consequence of breachingo Breach of benchmark rule will not invalidate the allocationo S 203-50(2)
Over-franking tax; or Penalty ranking debt.
Franking Deficit Tax Companies are required to keep a ‘franking account’, which records all franking transactions
(Div 205). During the year the account may be in surplus or deficit – s 205-40. BUT at the end of the year it must be in surplus or balance – s 205-45(1). Liability to pay FDT arises where an entity has a deficit in its franking account at the end of an
income year or immediately before it ceases to be a franking entity (s 205-45) IF it is in deficit at the end of the year the company must pay 'Franking Deficit tax' (FDT) to
bring it back to surplus – s 205-45(2). FDT payable is equal to the amount of the deficit in its franking account at the time FDT is not a general penalty and the company can claim an offset in future years for FDT paid
this year – s 205-70 (i.e. in effect, you are 'borrowing' franking credits for future years to frank this year’s distribution/s).
It can have a penalty component IF the franking deficit arose because the company over-franked its distributions. IF the company franked a distribution during the year and its deficit at the end of the year is >10% of the franking credits that arose during the year the offset is reduced by 30% - ss 205-70(2 and (8).
Companies as Shareholders If the shareholder receiving the dividend is another company it does the same as any other
taxpayer (i.e. it will ‘gross-up’ the dividend and claim a tax offset) But it also credits the franking credits it receives in its own franking account - to pass them on
to its own shareholders when it pays a dividend out of its income (which includes the dividends it receives) – see s 205-15(1) Item 3 in the Table
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Primary Producers
‘Primary Producer’ is not defined in the Act. However, any entity carrying on a ‘primary production business’ is entitled to the concessions that are provided for in the Act.
Section 995-1 Primary production business: you carry on a primary production business if you carry on a
business of:o Cultivating or propagating plantso Maintaining animalso Manufacturing dairy produceo Conducting operations relating directly to taking or catching fisho Conducting operations relating directly to taking or culturing pearls or pearl shello Planting or tending treeso Felling treeso Transporting trees to be milled or processed
Therefore, to be entitled to the concessions:o The taxpayer’s activities must fall within the s 995-1 definition; ando Those activities must be carried on as a ‘business’
Whether you are carrying on a business in a question of fact. There is no requirement that you derive all or even a major part of your income
from primary production. There is no requirement that you even earn a profit provided you can show an
sincere belief that you will ultimately do so. Size and scale of your activities are relevant considerations. The critical requirement is that you carry on your primary producing activities in
a business-like manner so they are more than a hobby. Activities that do not constitute carrying on a business include
Hobbies Domestic pursuits
Benefits of being classed as a primary producer Certain provisions provide higher deductions than normal or speedier write-offs of expenditure Certain provisions permit a deferral of the time at which abnormal income receipts becomes
assessable Income Averaging Income Equalisation Measures – currently Farm Management Deposits
Accelerated Deductions S 40-30(3) - Depreciation of improvements to land or fixtures on land (including e.g. fences,
dams etc.); From 12 May 2015, s 40-551 - An immediate write-off for fencing assets; S 40-645(1) - A (straight-line) 10 year write-off of capital expenditure for electricity
connection or upgrades S 40-645(2) - A (straight-line) 10 year write-off of the capital cost of telephone lines; S 40-630 - An immediate write-off for Landcare Operations for land used in a primary
production business;
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From 12 May 2015, s 40-540 an immediate write-off for expenditure on water facilities; Ss 40-515 to 40-570 – accelerated write-off for new horticultural plantings (100% for < 3 yrs;
increased rates for 3-30 years); and Section 70-120 - a special deduction for timber depletion.
Deferral of Income Double wool clips Insurance recoveries on losses of livestock and trees Death or Forced Disposal of Livestock.
385-135 Election to defer including profit on second wool clip(1) If your assessable income for an income year would otherwise include the *proceeds of the sale of 2 wool clips because fire, drought or flood causes you to shear your sheep earlier than normal, you can elect to include in your assessable income for the next income year the *profit on the sale of the earlier than normal wool clip.
For rules about the making and effect of an election, see Subdivision 385-H.(2) However, at the time the wool was shorn, the sheep must have been assets of a *primary production business you carried on in Australia. Also, the fire, drought or flood must have been in an area of Australia where you carried on that business at that time.(3) The proceeds of the sale of 2 wool clips are:
(a) the proceeds of the sale of the earlier than normal wool clip; and(b) an amount covered by one or more of the following: (i) proceeds of the sale of another wool clip in the income year; (ii) proceeds of the sale of wool shorn in the previous income year that you hold at the start
of the income year and that you took into account at cost in working out the *value of your trading stock under Division 60 at the end of the previous income year;
(iii) an amount for wool shorn in the previous income year that is included in your assessable income of the income year because of a previous election under this section.(4) The profit on the sale of the earlier than normal wool clip is the proceeds of the sale of the wool clip that would otherwise be included in your assessable income for the income year, less the expenses you incur in the income year that are directly attributable to the earlier shearing and sale.
385-130 Insurance for loss of live stock or treesIf your assessable income for an income year would otherwise include an insurance recovery
for a loss of *live stock, or for a loss by fire of trees, that you hold as assets of a *primary production business you carry on in Australia, you can elect:
(a) to include only 20% of the insurance recovery in your assessable income for that income year; and
(b) to include 20% of the insurance recovery in your assessable income for each of the next 4 income years.For rules about the making and effect of an election, see Subdiv 385-H.
385-145 Partnerships and trustsIf a partnership or trustee carries on a *primary production business, only the partnership or
trustee can make an election under Subdivision 385-E, 385-F or 385-G.
Averaging Income Div 392 A primary producer for 2 years or more (subject to other conditions) may average their income
and pay income tax at the tax rate applicable to their average income rather than their actual taxable income
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See diagram in s 392-5(1) See diagram in s 392-5(4)
Diagram in s 392-5(1)
Diagram in s 392-5(4)
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Steps in an Averaging Problem Calculate the taxpayer’s ‘basic taxable income’ for the current year Calculate the ‘comparison rate of tax’ Calculate the amount of taxable income that is subject to averaging – the ‘averaging
component’ (it includes the ‘taxable primary production income’ and the ‘taxable non-primary production income’)
Calculate the tax payable on the ‘basic taxable income’ at general individual rates and at the ‘comparison rate of tax’
Calculate the ‘averaging adjustment’.o If taxable income exceeds average income, calculate the tax offset; or,o If it is less than average income, calculate the extra income tax payable.
6. Calculate total tax payable.
392-15 Meaning of basic taxable income Work out your basic taxable income for an income year as follows:
o Method statemento Step One: Work out what would have been your taxable income for the income year if
your assessable income for the income year: Had not included any amount under section 82-65, 82-70 or 302-145 of the
ITAA97 (certain superannuation benefits and employment termination payments; and
Note: This means that certain deductions will also be excluded. Had not included any *net capital gain for the income year.
o Step Two: Subtract from the Step 1 amount any *above-average special professional income included in your taxable income for the income year under Division 405.
However, your basic taxable income for an income year is nil if:o You do not have a taxable income for the income year; oro The amount worked out under subsection (1) for the income year is less than nil.
The Comparison Rate S 392-40 Identify income years for averaging
o Also see s 392-10 S 392-45 Calculate your average income S 392-50 Basic income rates * average income S 392-55 ITRA86 Sch 7 or ATL page 66
Comparison Rate=Basic Income Rates on Average IncomeAverage Income
When Can You Start? S 392-10 Individuals who carry on a primary production business(1) This Division applies to your assessment for the *current year if:(a) you are an individual; and(b) you have carried on a primary production business in Australia for 2 or more income years in a row (the last of which is the current year); and(c) for at least one of those income years your basic taxable income is less than or equal to your basic taxable income for the next of those income years.
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The Averaging Component s 392-90 Where taxable primary production income (s392-80) is more than 0, the averaging component
(AC) is either:o If taxable non-primary production income (NPP)= 0
Basic taxable income = PP plus 0o If taxable non-primary production income (NPP) ≤$5,000
Basic taxable income = PP + NPPo If $5,000 < taxable non-primary production income ≤ $10,000
Taxable primary production income (PP) PLUS non-primary o Production shade out amount ($10,000 – Non-PP see s392-90(2)) o If taxable non-primary production income (NPP) > $10,000
Taxable primary production income (PP)
Averaging - Div 392 Dealing with Non-PP Income So this means when:
o Income from non-primary production activities is $5,000 or less the total amount qualifies for averaging: s 392-5(5) and s 392-90(1).
o Where the income from non-primary production activities is between $5,000 and $10,000 the amount of income which is eligible for averaging is $10,000 minus the non-primary production income: ss 392-5(5); 392-90(1) and (2).
o Where the income from non-primary production activities is equal to or greater than $10,000 none of it is eligible for averaging: s 392-90(1).
Compare Tax Payable At Basic Rates And At Comparison Rate Calculate tax payable on basic taxable income at comparison rates. Calculate tax payable on basic taxable income at basic rates. Compare:
o Where tax payable at basic rates > tax payable at comparison rate, primary producer entitled to an averaging adjust in the form of a tax offset.
o Where tax payable at basic rates < tax payable at comparison rate, primary producer pays extra income equal to the averaging adjustment.
The Averaging Adjustment S 392- 75 the averaging adjustment:
Gross Averaging Amount × Averaging ComponentBasic Taxable Income
S 392-70 the gross averaging amount is the difference between tax payable at the comparison rate and tax payable at basic rates.
Farm Management Deposits ITAA97 Div 393 (ss 393-1 to 393-65) A FMD made during a period is an allowable deduction; But cannot reduce income below $0; The owner of the FMD must be a primary producer when the deposit is made;
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The deposit can only be made on behalf of one person (so each partner in a primary production business would need to have their own FMD);
From 1 July 2014 the depositor’s non-primary production income < $100,000 Each deposit must be of $1,000 or more; Total deposits cannot exceed $400,000; The rights to the deposit must not be transferable; The deposit cannot be made subject to a charge or other encumbrance; The deposit cannot generally be withdrawn within 12 months; Withdrawals must be in amounts of $1,000 or more.
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Tax Collection
Tax is generally levied: Domestically
o By ‘assessment (may have withholdings or instalments)’; Internationally
o By ‘withholding’ (under s 254, s 255 or s 128B); oro By ‘assessment’
Assessment of individuals done under s 166
Commissioner’s Power to Retain Information Former provisions
o Two important powers in the provisions. These are former provisions that have been replaced. Essentially the same now, just worded differently in a different act.
o Section 263 The Commissioner or office shall at all time have full and free access to all
buildings, places, books, documents and other papers for a proper purpose, and make extracts from or copies of any such books, documents or papers.
Overrides rights against self-incrimination and obligations of confidentiality owed by third parties
ANZ v Konza Only legal protections are legal professional privilege
Stereis Donovan
Overrides duty of non disclosureo Section 264
The Commissioner or officer may by notice in writing require any person to: Furnish information Attend and give evidence Produce documents
Current provisionso Section 353-15 (1) of Sch 1 Tax Administration Act (TAA)
Provision The Commissioner, or officer authorised by him of her for the purpose of
this section: May at all reasonable times enter and remain on any land, premises or
place; and Is entitled to full and free access at all reasonable times to any
documents, goods or other property; and May inspect, examine, make copies of, or take extracts from, any
documents; and May inspect, examine, count, measure, weigh, gauge, test or anlyse any
goods or other property and, to that end, take samples. Can use this power to gain access without warning, but in practice does give a
notice. Must have written authority. If they fail to comply with this provision, it is a
criminal offence under s 353(15)
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Access must be full and free, and it must be for a bona fide purpose in tax law. Can use it as a random audit or a rote enquiry, or a fishing expedition.
If there is litigation going on, cannot use it to gain an unfair advantage for litigation purposes.
Can claim defense of legal professional privilege Esso Australia v FCT
This basically discusses legitimate confidential communication for the dominant purpose of obtaining legal advice or litigation
Documents are covered by legal professional privilege Pratt Holdings
There is an accounting concession. Cannot claim self-incrimination or duty of confidentiality.
o Section 353-10(1) of sch 1 TAA Provision
For the purpose of the administration or operation of tax law an authorised officer may by notice in writing require any person to:
Furnish information; Attend and given evidence; and/ or Produce documents
Replaces s 264 Has to set clear as to what they want from the person Test is whether a reasonable person in the position of the addressee of the notice
would fairly comply in the light of their knowledge and circumstance Hart
Works for documents and existing documents from third parties, but not required to create documents
Can claim legal professional privilege, and there is an accounting concession in practice, and can claim community interest
Cannot claim self-incrimination or duty of confidentiality.
Domestic Collection of Tax By PAYG (Pay As You Go):
o A single, integrated system for reporting and paying TWO types of tax: Tax on business and investment income Tax on ‘withholding amounts’
o Replaced previous nine systems. Now there are two. Installments for business or investment income, and withholding amounts.
o TAA 1953 (p 2061 textbook):o Designed to ensure that people do not have a huge tax at the end. Withholding amount
becomes a tax offset once figures out tax liability. If they pay too much in installments, get a refund.
Withholding – s 6-5(2)o ‘Withholding’ is the process by which someone else deducts amounts of tax from their
payments to you – and remits those amounts to the ATO.o Under PAYG withholding, amounts are deducted from the following ‘withholding
payments’ (s 10-5): Salaries, wages, allowances, bonuses or commissions paid to employees; Payments to company directors; Return to work payments; Payments under labour hire arrangements;
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Commonwealth education and training payments; Superannuation income, lump sum and eligible termination payments; Payments for unused leave; Compensation, sickness or accident payments; Payments from investments where the payee does not quote a TFN; Payments for supplies where the supplier does not quote an ABN; Payments to overseas residents; Alienated personal services payments; Non-cash benefits. May also elect withholding for HECs
o Some exceptions to no TFN or ABN If the payment is $75 or less (s 12-5(4)) To a minor and the payment does not exceed $350 per week
o Overseas residents are mostly based upon the shareholder or the bank account or royalty ownership having a registered address that’s overseas, then there is an obligation to withhold tax
o How much to withhold? The rate is either (TAA Sch 1 s 15-10)
The rate worked out under the withholding schedules made under s 15-25; or
Calculated under the regulations (if the regulations prescribe how the amount is to be worked out – as is the case where a TFN/ABN is not quoted)
NB - The rate can be varied by the ATO for individual taxpayers to take into account their personal circumstances (TAA Sch 1, s 15-15) – but not in cases where a TFN/ABN has not been quoted.
For non production of TFN/ABN = 49% Taxation Administration Regulation 1996 (p 2271 textbook) Interest dividend, royalties s 40 If dividend to non-resident, 30% for unfranked dividends, 15% if they have a tax
agreement with Australia, or not taxed if it is fully frankedo Effect on Payee
The Payee is entitled to: A credit against his/her tax liability for amounts withheld (s 18-15)
o If they aren’t required to pay that amount of tax they get a refund (s 18-32)
A refund of amounts withheld in error (from either the payer or the ATO)
The Payee must generally keep the Payment Summary for 5 years from the date of issue of the notice of assessment (2 years for those with very simple tax affairs) – s 18-100
Instalments – s 6-5(3)o A system for businesses and individuals to pay instalments of their expected tax liability
on their business and investment income for the current income year (TAA Sch 1, s 6-5(3)).
o Therefore, unless they choose otherwise, a taxpayer’s PAYG instalments will be based on their ordinary income and will be paid after that income has been earned.
o Will be based upon their current estimate (gross ordinary income) or use previous year to assume the same
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o Entities Affected by PAYG Instalments – s 45-10 Sch 1 TAA Individuals (such as sole traders or investors) – including partners in a
partnership and beneficiaries and trustees of trusts; Superannuation funds; Companies; and Other entities taxed like companies.
o Trigger The trigger for liability to pay PAYG instalments is the Commissioner giving
you, by written notice, an instalment rate (see TAA s 45-15). Method for rate is TAA sch1 45-115, 45-110 is installment rate model v
installment incomeo PAYG instalments are payable monthly, quarterly or annually
Most would be required to pay quarterly, unless they elect for annually. Can opt for annually if not registered and most recent tax amount is less than $8000. Big businesses that earn over one billion dollars are required to pay monthly.
Once work out tax liability, get offset for tax already paid. S 45-30.
Tax Evasion, Planning, and Avoidance
Tax Evasion Tax evasion concerns illegal underpayment by non-disclosure or fraudulent claims in
deductions that are not entitled to Penalties and jail terms apply Mostly in cash economy avoid declaring received income.
Tax Avoidance and Planning Tax avoidance involves entering into legal arrangement designing to exploit unintended
loopholes in the legislation With tax avoidance, there is one way of doing it that is okay, and the other is not okay. The okay way is when adopt a legal mechanism in the tax act and plain a business structure and
plan claims and so forth and it is all legitimate.o This is called tax planning.
It becomes tax avoidance and is a problem when those laws are used and it is artificial. The way the Tax Act combats tax avoidance is within the provisions there may be rules
(deemed dividends etc.), and the ATO would rely on Part IVA if it is not caught by those specific rules.
Elements of Part IVA Three parts
o Schemeo Tax Benefito Dominant purpose
Have to have entered into a scheme after May 27, 1981, and entered into a scheme and entered or carried out scheme for the purpose of that tax benefit.
o S 177D(4) specifies May 27, 1981.o Tax benefit obtained is in (3).o Matters have to consider in (2).
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Schemeo See s 177A definition
Tax Benefito See s 177C (and s 177E - dividend stripping schemes.)o ‘Reasonable Expectation’ test.
Dominant Purposeo S 177A(5) - definition of ‘purpose’o S 177D - matters to be taken into account.
Overall Commercial Purpose as a Defenceo Since Spotless (1996) 186 CLR 404; 96 ATC 5201 this defence appears not to be
available - but it is still not clear. o The Court held that the ‘dominant purpose’ is the ‘ruling, prevailing or most influential
purpose’ behind the scheme – so look for that purpose.o Further, it seems that the Commissioner can select a very narrow ‘scheme’ for the
purposes of Part IVA and thereby can effectively exclude consideration of the commercial aspects of a transaction as a whole and focus on those elements that were designed to achieve a tax benefit.
Consequenceso Cancellation of the benefit – s 177F(1)o Compensating Adjustments – s 177F(3)o Imposition of Penalty Tax – s 284-160 in Schedule 1 to the Taxation Administration
Act (50% of the 'scheme shortfall amount’ - or 25% if it is ‘reasonably arguable’ that Part IVA does not apply).
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