Taxation Law
Assessment Title: Assessment 3- Individual assignment
• This assignment must be presented as an individual effort.
• The assignment requires individual research using a range of tax resources. It is expected you will survey the relevant literature, including decided cases, and select appropriate additional resources.
• You are expected to identify the facts and issues presented by each question, identify and apply the relevant legislation and/or case law, and reach a conclusion.
• This assessment assesses your research skills, your ability to synthesise an original piece of work to specific content requirements. It also assesses your written communication skills.
• Your reasons for your conclusions and recommendations must be based on your research into the relevant cases and legislation. Please check the marking sheet (included below) for Part A to ensure that you have followed all the guidelines
• •
PART A: Written letter of advice.
(10 marks)
PART B: Advise net capital gains (losses) to be included in Madison Turner’s tax return for the years ending 2019 and 2020. Include ALL available methods for calculating a capital gain for both years. (10 marks)
Assessment Description
PART A: Written letter of advice.
Due to COVID-19, Madison was informed by her two current employers that she would be nominated as an eligible recipient for JobKeeper payments from the government. Madison is confused about the tax ramifications of receiving JobKeeper payments and she is seeking your advice. In your own words, explain the tax treatment of JobKeeper payments to Madison and the potential impact of having two employers nominating her. She also has some sole trader income on the side and is wondering whether this will impact her nomination. (500 word limit)
PART B: Calculate net capital gains (losses) to be included in Madison Turner’s tax return for the years ending 2019 and 2020.
Madison Turner, an Australian resident, seeks advice on the CGT consequences of the following events. She exchanged contracts for the acquisition of an investment property, at market value, on 30 January 1999, paying a 10% deposit of 60,000. Property settlement was deferred until 10 December 2001, when the balance of $540,000 was paid, title transferred, and her name was recorded as the registered proprietor. At the time of the settlement, the market value of the property was $800,000. She sold the property on 15 June 2019 for $1 million.
She also bought 20,000 shares in BHP Billion in October 1985, paying $18.50 per share. She decided to sell her entire holding, for $40 per share, and signed a share transfer document and handed the transfer and share script to the Stock Exchange on 21 June 2019. The transfer was not registered with BHP Billiton until 10 July 2019.
She also incurred a capital loss of $50,000 from another CGT event in 2019/2020.
You have to include ALL available methods for calculating the net capital gains for the years ending 2019 and 2020.
You have to show all workings.
ACC304
Taxation Law
Workshop 4
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Explain the connection between statutory income,
assessable income and taxable income
Assessable income = ordinary income +
statutory income
Statutory income is assessable income by
virtue of a specific section of law.
Includes amounts that are not ordinary income,
but are included in your assessable income
under a specific section of law (Section 6-10(2))
Statutory Income
Where income may be included in assessable income by
more than one section of law, Section 6-25 states the
amount is included once only.
• The statutory provision overrides the general provision.
The two types of income form assessable income and are
connected to the basic tax equation contained in s 4-15
ITAA 1997:
Assessable income – allowable deductions = taxable
income
Is statutory income defined in either ITAA?
Why, or why not?
Discuss the following comment:
The amount of money you receive will
also always be the amount of statutory
income you need to put in your tax return.
Discuss the following comment :
The concept of statutory income is irrelevant
as every receipt is a form of ordinary income
and will be included in assessable income.
Learning Objective 2
Calculate the franking credit associated with a franked
dividend and correctly apply the relevant law
s
A dividend is defined in Section 6(1) ITAA 36 to include any
profit distribution made by a company to its shareholders.
There are two related provisions:
Example
In April 2018, John receives a franked dividend of $70 from
BHP Ltd. According to the Distribution Statement, this
dividend is franked to 100%.
Assessable income = Dividend $70 Section 44(1)(a) AND
Imputation Credit $30 Section 207-20(1)
Franked dividend
How does it work?
The dividend itself is assessable income $70. The imputation
credit is added to the assessable income even though it is an
imaginary amount. The credit is a tax offset applied against the tax payable on
John’s taxable income.
Formula (Assume tax rate of 30%)
Amount of franked dividend x 30 x % franked
70
Therefore: $70 * 30/70 * 100% or $30
Assessable income = $70 + $30 = $100
Cash = $70 Is this a good deal?
Dividends can be fully or partially franked.
In April 2018, John receives a franked dividend of $70 from BHP Ltd.
According to the Distribution Statement, this dividend is franked to an
extent of 50%.
Formula $70 * 30/70 * 50% = $15
Assessable income = $70 + $15 = $85
Roberto is a resident for the full year and receives a cash
dividend of $880 from The Hill Pty Limited, which was 95%
franked.
He also received a cash dividend of $1,000 from Broken
Crown Pty Limited which was 75% franked.
Roberto reinvested the dividend from Broken Crown Pty
Limited through their dividend reinvestment plan.
• In relation to these transactions, how much will
Roberto include in his assessable income?
• A company paid a 45% percent franked
dividend of $7,000 to a resident shareholder.
• Required
• Calculate the imputation(franking) credit
associated with the dividend and identify
which sections the dividend and
imputation(franking) credit are assessed
under.
• Explain the tax benefits of the imputation
(franking) credit to a resident investor.
Learning Objective 3
Calculate the assessable amount associated with
trading stock and apply the relevant law
s70-10 ITAA97
Meaning of trading stock
(1) Trading stock includes:
(a) anything produced, manufactured or acquired that is held
for purposes of manufacture, sale or exchange in the
ordinary course of a * business; and
(b) * live stock.
What are some examples of trading stock?
Business income from sale of trading stock is assessable under
s6- 5(1) – ordinary income from business activities. Purchase of
trading stock is deductible under s.8-1(1). It is not capital
(s.70-25).
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#trading_stock
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#acquire
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#held
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#business
Trading stock
Compare the values of trading stock on hand at the start of
the income year and at the end of the income year
(s.70-35(1)).
• If closing stock is greater than opening stock, the excess
is assessable income (s.70-35(2)).
• If opening stock is greater than closing stock, the excess
is an allowable deduction (s.70-35(3)).
Yankers Enterprises Pty Ltd sells training course materials to
organisations. The materials are imported from a United States-based
course developer and on-sold for a profit. Yankers provides you with
the following information for the purposes of preparing its income tax
return for the CIY:
Sales $690,000
Less; Cost of goods sold
• Opening stock $120,000
• Plus: purchases $530,000
• Less: closing stock $250,000 $400 000
Gross profit $290,000
What is Yankers Enterprises’ assessable income for the current
income tax year?
Kezza runs a small business. Her opening
balance of stock was $4,000. During the year
there was sales income of $30,000 and
purchases of $5,000. Trading stock valued at
$500 was destroyed due to water damage.
The closing balance of stock was $6,000 and
reflects the reduction due to stock damage.
• What is the taxable income from trading
for the CIY?
Explain which of the following items could be
considered as trading stock:
• Shares traded on the ASX
• Accounts receivable
• Land
• Unpicked fruit
• Unmined coal
• Work in progress for a manufacturer
• Goods in transit
Learning Objective 4
Calculate the assessable amount associated with
assessable balancing adjustments and apply the
relevant law
s40-285 Assessable balancing
adjustment
When a depreciating asset is disposed of the proceeds of
the sale, or termination value (TV), is compared to the
written down value, called the adjustable value (AV), on the
day of disposal.
• If the TV is greater than the AV the excess is assessable statutory
income under s40-285(1)
• If the TV is less than the AV the difference is an allowable deduction
under s40-285(2)
Example
A depreciating asset with an AV or $5,500 was sold for $6,250. There
is an assessable balancing adjustment of $750.
Basil Pty Ltd sells a computer which has
been used for income-producing purposes.
The termination value of the computer is
$1,500 and its cost was $2,500. At the time
of sale, the computer’s adjustable value is
$1000.
What is the balancing adjustment amount
in respect of the sale?
A non-current asset is a depreciating asset. It
initially had a depreciation cost base of $45,000, it
cost $2,500 to transport and install the item, and it
has an effective life of 5 years for tax purposes and
was purchased on 1/7/15. It was sold on 1/4/17 for
$27500.
Required
State the relevant legislative provisions and
calculate:
• the depreciation expenses for each relevant year
income year under both the Prime Cost method
and the Diminishing Value method
• any assessable or deductible balancing
adjustment associated with this disposal.
In 1985 the inequitable distinction between capital and
income receipts was partially addressed by the introduction
of a capital gains tax.
Essentially if a taxpayer makes a net capital gain related to
a CGT asset it will be included in assessable income and
taxed at the taxpayer’s marginal rates.
Capital gains tax will be the focus of our next workshop
- ACC304�Taxation Law
- COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Learning Objective 2�
- Learning Objective 3�
- Learning Objective 4�
- s40-285 Assessable balancing adjustment
Learning Objective 1
Statutory income
Statutory Income
Class activity 1
Class activity 2
Class activity 3
Franked dividends
Franked dividend
Partial franking
Pre-workshop question 1
Pre-workshop question 2
Trading stock s70-10 ITAA97
Trading stock
Class activity 4
Pre-workshop question 3
Class activity 5
Class activity 6
Pre-workshop question 4
Net capital gains
ACC 304
Taxation Law
Week
7
General Deductions
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Identify and apply the 2 positive limbs in
2
Section 8-1
• 1-2 above represent the 2 positive limbs
• 3-4 above represent the 4 negative limbs
Section 8-1(1) allows a deduction for a loss or
outgoing to the extent it is incurred in gaining or
producing assessable income.
What is the difference between a loss and an
outgoing?
Loss
• A loss may be subtly different, it has the connotation of something
which has been used up or maybe something not voluntarily spent
by the taxpayer.
• The loss may not necessarily be linked to the income production
but is actually incurred in the course of gaining or producing
assessable income. A loss is a reduction of income or capital.
• For example, the theft of the days takings was found to be
deductible in Charles Moore & Co (WA) Pty Ltd (19
5
6) as it was a
loss incurred in business activities.
5
Meaning of “loss or outgoing”
Outgoing
• Suggests something paid out – something which has left the hands of the
tax-payer so the outgoing is an expenditure which has (hopefully) the
effect of gaining or producing income
• Generally considered to constitute a voluntary payment. Most business
expenses such as advertising, rent, telephone, electricity and wages
would be considered outgoings and, hence, be deductible, under Section
8-1.
• For example, the purchase price of goods which are subsequently sold
What is a deduction? Give examples that might
apply to a coffee shop?
7
What is the meaning of the words “loss or
outgoing” in Section 8-1 ITAA 97?
8
• Discuss some outgoings/expenses your likely
to find in Items D1, D2, D5 and D10 of the
income tax return.
• Students should provide their own examples
and explain how the deduction works in a real
context.
• Individuals – Tax return 2018
9
https://www.ato.gov.au/Individuals/Tax-return/2018/
Any loss or outgoing to the extent that……
• This phrasing allows the apportionment of an
expense when the purpose associated with the loss
or outgoing is only partially related to the assessable
income.
• In this case only that part of the loss or outgoing
related to the assessable income will be deductible.
• Mary is a sales consultant with Honda. She uses her
mobile telephone, to make work-related telephone
calls. Her mobile telephone bill for the month of June
2018 was $200. Mary reliably estimates that she
used the phone 75% for business purposes and
25
%
for private purposes.
Student discussion
• How much can be claimed?
• Section 8-1 requires that the loss or outgoing
is incurred. What does this mean?
• Lets review TR 97/7 Paragraph 6 and
21
.
Meaning of “incurred”
Tax Ruling 97/7 Summary
• Does incurred mean “paid”? No.
• The liability must exist which requires the
payment of an expense.
• If you don’t know the exact amount, a reliable
estimate is fine.
• Discretionary payments are not a deduction
until paid (Para 21 examples).
• Jack receives his electricity bill on 20 June 2018.
Assume that Jack uses the electricity to power his
business 100%. ( Why is this important ?). The amount
of $1,200 is due for payment on 10 July 2018. Jack
pays his electricity bill on 2 July 2018.
• When is the outgoing incurred?
• Would your answer be the same if Jack was paying his
car registration for the next 12 months? Why?
Incurred in gaining or producing
assessable income
• In discussing what makes expenditure
deductible under subsection 8-1, Lockhart J
said in F C of T v. Cooper 91 ATC 4
39
6; 21
ATR 1616 (at ATC 4399, ATR 1620) that the
phrase “incurred in gaining or producing
assessable income” in the first limb of s. 8-1
has been construed to mean incurred in the
course of gaining or producing assessable
income…
15
• There should always be a nexus between income
and the outgoing incurred. The payment of the
outgoing does not have to be in the same year as
the income was incurred (TR 94/28).
• It is sufficient if the expenditure produces future
income or reduces future expenditure or was
incurred in deriving income of a previous
accounting period.
Nexus Test
The commissioner has released a number of
occupation-based taxation rulings dealing with
employees. Rulings TR 95/8 to 95/20 cover a
selection of occupations and allowable
deductions.
17
• Expenses incurred before commencement of a
business are not deductible under Section 8-1.
(Softwood Pulp & Paper Ltd v FCT 76 ATC 4439).
• Hence, preliminary expenses connected with the
establishment or acquisition of a business (e.g.
incorporation of a company, initial business name
registration etc.) are not deductible under Section 8-1
because they are incurred at a point considered “too
soon”.
Discuss whether the following would be deductible
under Section 8-1 of the ITAA (1997):
•Internet bill dated 18 June 2018 for $200 where the
taxpayer was able to establish a pattern of usage
showing that it was used 100% for business.
•Mobile phone bill dated 8 June 2018 for $130. The
phone was used for calling family members.
•ASIC fee invoice dated 12 June 2018 for $100 in
respect of the registration of a new business name.
19
Section 8-1(2) allows a deduction for a loss or
outgoing to the extent it is necessarily incurred
in carrying on a business for the purposes of
gaining or producing assessable income.
• The words “necessarily incurred” does not mean that
the outgoing must be absolutely essential or
necessary.
• For practical purposes, it is for the person carrying on
the business to be the judge of what outgoings
are necessarily to be incurred.
• It is not for the Commissioner to instruct a taxpayer as
to the nature and extent or manner of conduct of his or
her business activities (Tweddle (1942) 180 CLR 1).
21
http://www.austlii.edu.au.ezp01.library.qut.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/1942/40.html
Carrying on a Business
The second positive limb is all about business. What’s a
business? The courts have developed several characteristics
for a business activity (Ferguson v FCT) including:
the repetitions of acts or transactions
the commercial nature of the activities
the size and scale of the activities
the existence of a profit motive and;
whether the activity is conducted in a systematic manner
Are you carrying on a business?
22
https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/are-you-in-business-/
• There may be instances where a loss or outgoing
has more than one purpose (i.e. a dual purpose).
The Commissioner may disallow all or part of the
deduction being claimed (see Fletcher & Others v
FCT91 ATC 4950 and Taxation Ruling TR 95/
33
).
• In other words, if the Commissioner believes that
the taxpayer has deliberately over-inflated the
amount of the expenditure to gain an additional
tax deduction, he may disallow a portion of the
expenditure. Ure v FCT(1980) 11 ATR 484.
23
Meaning of “purpose”
The “purpose test”
• In general the nature of the business and the
appropriateness of the outgoing to the business ends
pursued is the most important factor as per Magna Alloys
case.
• The Magna Alloys decision referred to 2 tests:
(1) the outgoing being reasonably seen as desirable or
appropriate to pursue the business ends of the business
(determined objectively) and,
(2) If so, whether the person carrying on the business so saw
it (subjective).
Provided the outgoing comes within that wide ambit it will
necessarily be incurred in carrying on that business
24
Tony is a doctor. He has the following items in his
waiting room:
• woman’s day magazines for clients to read
• flowers to freshen up the room
• cups for the water cooler
Can Tony’s business claim these items as a tax
deduction?
25
Identify and apply the 4 negative limbs in
Section 8-1
26
1st Negative Limb
It is a loss or outgoing of capital, or of a capital
nature.
• Capital losses or outgoings and losses or outgoings of a capital nature, even
though they are incurred in the course of producing assessable income, are
not deductible under s 8-1.
• The most useful test in this area is the structure or process perspective
• Losses or outgoings associated with the process of gaining or producing
assessable income tend to be income in nature and deductible
• Losses or outgoings associated with the structure of the activity tend to be
capital and therefore non-deductible in the first instance but may be able to
be amortized for tax purposes.
The four negative limbs
1st Negative Limb
Example
Is the cost of transporting trading stock deductible?
Yes, as trading stock is clearly connected with the income producing process
Is the cost of transporting a large machine deductible to the factory so that it
can be installed?
No, as the machine is a capital asset therefore the associated costs are
capital in nature and not deductible under s8-1. The capitalized value of the
machine would be amortized for tax purposes
It is a loss or outgoing of a private or personal
nature.
• Fullerton v FC of T 91 ATC 983 – A taxpayer moved his family
to a new city due to a change in employment. Decision
(Private).
• Lodge v FC of T 72 ATC 4174 – Child minding so as to attend
work. Decision (Private).
It is incurred in relation to gaining or producing
exempt income or assessable non –exempt
income.
• Under the third negative limb of Section 8-1(2) of the ITAA
(1997), losses and outgoings incurred in producing exempt
income are not deductible
Losses and outgoings are not deductible where
another provision of the Act prevents the
deduction.
Apply the law to determine the deductibility of a
given expense under s8-1 ITAA97.
Refer to Workshop Readings
32
Discuss whether the following would be
deductible under Section 8-1 of the ITAA (1997):
• A manager of a production business travels to
Hong Kong to buy a machine. The machine is
worth $1million. The travel costs including
accommodation are $15,000.
33
On many occasions, taxpayers have sought deductions for the cost of
purchasing clothing. The main issue that arises in these cases is
whether such expenditure is of an income-producing or private nature.
Conventional clothing –Mansfield v FC of T96 ATC 4001 (General
rule)
Compulsory uniforms – Examples; police officers, airline pilots.
TR 97/12
• Para 30 – deduction allowed
• Para 31 – a collection of clothing that is distinctive to an
organization.
34
Clothing
Occupation specific clothing
•Examples; nurse’s uniform, barrister’s robes. A
deduction is generally allowed.
•The items can’t be conventional clothing
Protective clothing
•Examples; steel cap boots, safety helmets
•Morris & others v FCT (2002)
•Can now claim sun protection and hats to
protect the taxpayer from ultra-violet radiation
35
Discuss whether the following outgoings would
be allowed as a tax deduction
• A police officer washes her police uniform.
• A school teacher wears a $200 pair of
sunglasses whilst on playground duty.
• The cost incurred by an employee accountant
in buying a suit compliant with the employer’s
dress code worn to impress clients so they
can gain more clients.
36
• Interest expenses are recurrent expense securing the use of
borrowed money during the term of the loan.
• It is the purpose the borrowed funds are put to which determines
the deductibility of the interest.
• Interest on funds used to purchase a property on which the
taxpayer intends to build an income producing asset may be
deductible from the time of purchase (Steele v FCT, 1999).
• It is not necessary to show the interest was incurred in producing
assessable income in a particular year.
• It need not even produce assessable income as long as it is
expected to produce assessable income.
• In FCT v Brown (99 ATC 4852) the interest on a loan taken out to
purchase a business continued to be deductible even after the
business had been sold.
• Refer to TR 2004/4 for extensive discussion on interest
deductibility.
37
• The principal issue that arises under Section 8-1
in relation to legal expenses is whether such
expenses are linked to the purpose of incurring
the expense. Legal expenses of a private or
capital nature are not deductible.
• Legal expenses are generally deductible if they
arise out of the day to day activities of the
taxpayer’s business.
• Compare the decision in the cases of :
Herald & Weekly Times Ltd v. FCT and
Sun Newspapers v. Ltd FCT.
38
Would the following be deductible under section
8-1?
• Legal expenses incurred by a hotel proprietor
in opposing an application for a licence to
open another hotel in the area.
39
- ACC 304�Taxation Law
- �COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Meaning of “loss or outgoing”�
- Incurred in gaining or producing assessable income
- Nexus Test�
- Carrying on a Business�
Learning outcome 1
Section 8-1
1st Positive Limb
Meaning of “loss or outgoing”
Class Activity 1
Class Activity 2
Class Activity 3
“to the extent that”
Example -“to the extent that”
Meaning of “incurred”
Meaning of “incurred”
Pre-workshop question 1
Nexus Test
Expenses incurred too soon
Pre-workshop question 2
2nd Positive Limb
Necessarily incurred
Meaning of “purpose”
Meaning of “purpose”
Pre-workshop question 3
Learning outcome 2
The four negative limbs
The four negative limbs
2nd Negative Limb
3rd Negative Limb
4th Negative Limb
Learning outcome 3
Pre-workshop question 4
Clothing
Clothing
Pre-workshop question 5
Interest expenses
Legal Fees
Class Activity 4
ACC
30
4
Taxation Law
Week 8
Specific Deductions
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the Act
.
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you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business
School and other materials copyrighted by K. Sadiq et al.
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After this workshop, you should be able to determine the
availability and amount of the tax deduction associated
with:
• Tax related expenses
• Repairs
• Borrowing expenses
• Bad debts
• Travel between workplaces
• Carry forward losses for individuals
• Depreciable assets
•
balances
2
Specific deductions: s8-
5
(1) You can also deduct from your assessable income an
amount that a provision of this Act (outside this Division)
allows you to deduct.
(2) Some provisions of this Act prevent you from deducting
an amount that you could otherwise deduct, or limit the
amount you can deduct.
(3) An amount that you can deduct under a provision of this
Act (outside this Division) is called a specific deduction.
.
Apply the legislation to determine the availability
and amount of the tax deduction associated with
tax related expenses.
4
Tax related expenses: s
25
-5
Section 25-5 provides taxpayers with a deduction for certain costs,
including expenses incurred:
• to manage their “tax affairs”;
• to comply with a notice or obligation imposed on the
taxpayer by a Commonwealth law relating to the
taxpayer’s tax affairs;
• for payments of the general interest charge; and
• for certain valuations.
Definition of “tax affairs” and“ tax” limit the deduction to income tax
obligations only (s.995-1).
For other taxes (e.g. GST and FBT), consider deductibility under s.8-1
(General Deductions)
5
Deductions unders.25-5 are not available in certain
circumstances, for example:
• payment of the income tax;
• Amounts withheld or payable under the PAYG system;
• Interest on funds borrowed to pay income tax or PAYG
amounts;
• advice from an adviser who is not a “recognised tax
adviser” as defined in s995-1 (registered tax agent,
and legal practitioners)
• capital expenditure (e.g. purchasing a computer to
manage tax affairs, however, depreciation will be
deductible).
6
Apply the legislation to determine the availability
and amount of the tax deduction associated with
repairs.
7
(1) 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.
(2) 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.
(3) You cannot deduct capital expenditure under this section.
25-10 Repairs
Replacement of a whole asset
A repair involves the restoration of part of some income-
producing property. It does not involve the replacement of an
asset in its entirety but rather a subsidiary part or component.
Lindsay v FCT (1961) 106 CLR 377
An improvement to an asset is not a repair
A repair involves the restoration of an asset to its original
state.
FC of T v Western Suburbs Cinema Ltd (19
52
) 86
CLR 102.
25-10 Repairs
Initial repairs
Expenditure incurred to put the asset into good order
before it can be used to produce assessable income is
an initial repair and is not deductible. Essentially the
taxpayer has the benefit of the lower purchase cost.
The Law Shipping Co Ltd v IR Commrs (19
24
) 12 TC 6
21
;
W Thomas & Co Pty Ltd v FCT (1965) 1
15
CLR 58.
The taxpayer purchased a building, unaware that repairs were
needed in order to be able to use the building in its business as
a flour and grain merchant.
The taxpayer subsequently carried out extensive work to the
roof, guttering and floors, and painted the walls and roofing
timbers.
At the same time, the taxpayer also altered and enlarged an
office and installed a lunch room and other amenities.
• Expenditure was of a capital nature.
• When a thing is bought for use as a capital
asset in the buyer’s business, but is not in
good order nor suitable for use in the way
intended, the cost of putting it in order suitable
for use was part of the cost of its acquisition .
Lindsay v FCT
Facts:
• Ship repairing business .
• Lindsay demolished one of its slipways
and replaced it.
• Lindsay argued slipway was part of its
business premises or part of the hauling
machinery.
Held:
• Not a repair.
• Slipway was an entire asset.
• Renewal in this case was ‘reconstruction’
of the entirety.
Law Shipping Co Ltd v IRC
Facts:
• Taxpayer acquired a ship which required a repair.
• Undertook one voyage, then repaired it.
Held:
• Capital expenditure, not a repair.
• The cost of this ‘initial repair’ formed part of the
acquisition costs, therefore was capital.
• Taxpayer would have paid a lower price for the
ship due to the need for repair.
• Expenditure was necessary at the time of
purchase to render the ship serviceable.
• Jack purchased business premises on October 5, 2017. Jack
incurred the following expenses:
• On October 8, 2017, Jack replaced 20 roof tiles at a cost of $800.
Jack used steel roof tiles to replace the old clay roof tiles.
• On December 24, 2017, Jacks replaced the petrol engine in his
Mazda 3 with a new Turbo Diesel engine (fuel efficient and more
power).
• On January 24, 2018, Jack paid a gardener for a day’s work at his
business premises $400. The gardener mowed the lawn and
pruned the hedges.
• On March 2, 2018, a bad storm damaged the carpets in the main
office. The entire carpet was replaced at a cost of $8,700.
How much of these expenses can be claimed under Section 25-10
ITAA 97 (Repairs) ?
15
Apply the legislation to determine the availability
and amount of the tax deduction associated with
borrowing costs.
16
Section 25-25 ITAA1997 allows a deduction for expenditure
incurred for borrowing money and the purpose of the money is
to produce assessable income. Borrowing expenses which are
$100 or less, are fully deductible in the year the expense was
incurred: s25-25(6) ITAA1997
• These costs refer to the “cost” of borrowing and include
valuation fees, survey fees, stamp duty, and legal costs.
• Borrowing expenses DO NOT include interest expenses.
Interest expenses are considered under s8-1 ITAA1997.
25-25 Borrowing Expenses
Expenses incurred in borrowing money are deductible over the
shortest of these periods:
• the period of the loan as specified in the original loan
contract;
• the period starting on the first day on which the money was
borrowed and ending on the day the loan is repaid; or
• five years starting on the first day on which the money was
borrowed (s25-25(5) ITAA1997).
25-25 Borrowing Expenses: Example
On 2 January 2008, Jett obtained a four-year
loan of $15,000, which she used solely for
income-producing purposes throughout the
period of the loan.
Borrowing expenses incurred in relation to the
loan amount to $400. The total period of the
loan was four years (1,
46
1 days). The
period applicable to the 2008 financial year is
181 days (a leap year).
25-25 Borrowing Expenses: Example
The borrowing expenses ($400) would be
allowed as follows:-
2008: $ 49.56 ($400 x 181/1,461 days)
2009: $ 99.93 ($400 x 365/1461 days)
2010: $ 99.93 ($400 x 365/1461 days)
2011: $ 99.93 ($400 x 365/1461 days)
2013: $ 50.65 ($400 x 185/1461 days)
$400.00
Jane purchased a rental property on 1 September 2017
for $500,000. Tennant’s occupied the house at the time of
purchase. Jane provides you with the following
information:
• Jane took out a $400,000 loan with the NAB on 1
September 2017 for 25 years to fund the purchase.
Interest paid for the financial year ending 30 June 2018
totalled $14,560.
• Loan establishment fees of $5,200 were charged by
the bank on 1 September 2017.
• What is the total deduction for the 2018 financial year?
Please quote relevant sections.
21
Apply the legislation to determine the availability
and amount of the tax deduction associated with
bad debts.
22
Bad debts (s. 25-35)
A deduction for bad debts under s.2
53
5 is available when the following
criteria is met:
1. there is an existing debt – must have had a legal
or equitable right to claim
2. the debt is bad – the taxpayer must have taken all available legal
steps to recover the debt TR 92/18
3. the debt is actually written off. There must be some written record
e.g. board minutes, memo from Financial Controller or accounting
entries – a mere provision is insufficient
4. it was included in the taxpayer’s assessable income – for accruals
taxpayers; this requirement would not apply of course to cash
basis taxpayers
23
Refer to the link below.
Bad debts s 25-35
In your own words, describe a bad debt for
taxation purposes. Provide your own example.
24
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.35.html
Apply the legislation to determine the availability
and amount of the tax deduction associated with
travelling between places of work.
25
Travel between workplaces (s. 25-100)
Common law position:
•Travel between unrelated work places are not
deductible unders.8-1 FCTvPayne(2001).
Later a statute (s.25-100) was introduced:
•Deduction allowed for travel directly between two
workplaces where the taxpayer is engaged in income
producing activities
•Not deductible if a workplace is the taxpayer’s
residence.
Travel between workplaces
26
https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/travel-between-home-and-work-and-between-workplaces/
Apply the legislation to determine the availability
and amount of the tax deduction associated with
prior year losses.
27
Tax losses of earlier income years:
Div 36
s36-10 How to calculate a tax loss for an
income year
(1) Add up the amounts you can deduct for an income year (except
tax losses for earlier income years ).
(2) Subtract your total assessable income.
(3) If you derived exempt income, also subtract your net exempt
income (worked out under section 36-20 as Exempt Income – Losses
or outgoings incurred in producing exempt income – Any income tax
paid to foreign governments)
(4) Any amount remaining is your tax loss for the income year,
which is called a loss year.
If you cannot deduct all or part of your tax loss
in an income year, that amount can be carried
forward into the next income year.
What is a loss for taxation purposes according
to Division 36 of the ITAA (1997) ?
30
2014/15 2015/16 2016/17
Assessable income $70,000 $65,000 $90,000
Net exempt income $ 4,000 $ 2,000 $ 8,000
Deductions * $83,000 $60,000 $96,000
Personal Superannuation
contributions (that fit inside the
concessional cap)
$ 2,000 $ 2,000 $ 2,000
Gifts to registered charities – $ 400 $ 2,000
31
*Note: Deductions represents all deductions except superannuation,
gifts and losses of previous years.
The above data relates to Gandalf Greyteeth, a resident
taxpayer:
For each tax year, determine Gandalf’s taxable income and
any losses that may be carried forward.
Apply the legislation to determine the availability
and amount of the tax deduction associated with
depreciable assets.
32
Capital allowances – Division 40
Deductibility of capital expenditure
• Deduction for “decline in value” of a
depreciating asset held for a taxable
purpose: s 40-25.
• Balancing adjustment deduction if a
depreciating asset’s termination value is
less than its adjustable value: s 40-285(2).
s40-25 Deducting amounts for
depreciating assets
You deduct the decline in value
(1) You can deduct an amount equal to the decline in
value for an income year (as worked out under this
Division) of a depreciating asset that you held for any
time during the year.
(2) You must reduce your deduction by the part of the asset’s
decline in value that is attributable to your use of the asset,
or your having it installed ready for use, for a purpose
other than a taxable purpose.
(1) A depreciating asset is an asset that has a limited
effective life and can reasonably be expected to
decline in value over the time it is used, except:
(a) land; or
(b) an item of trading stock; or
(c) an intangible asset, unless it is mentioned in
subsection (2).
This is determined from the cost base.
There are two relevant elements (s.40-175).
The first element is worked out when you begin
to hold it and is normally the purchase price
(s.40-180(3)).
It could also be the amount you are taken to
have paid (s.40-185).
What is the relevant value?
The second element of the cost base includes
costs in bringing the asset to its present
condition and location and costs
attributable to any balancing adjustment events
(s. 40-190)
Examples include costs of delivery, installation,
capital improvements, site preparation.
Depreciation starts at the time the asset is first
used or installed and ready for use. (s.40-60(2)
The taxpayer can choose between the
Diminishing Value or Prime Cost methods.
(s.40-65(1)
Once the choice is made the method cannot be
changed (s.40- 130(2)
The DVM gives greater deductions in the earlier
years, under the PCM the same amount is
claimed each year
Under s 40-75(1) the deduction is calculated by:
Asset’s cost x Days held x 100% x Business use %
365 Asset Effective Life
Under ss 40-70(1) & s40-72(1) the deduction is
calculated by:
Base
Value x Days held x 200% x Business use %
365 Asset Effective Life
Base value = Cost at start time OR opening adjustable value plus second
element costs
*If start time is before 9 May 2006, use 150% rather than 200%
(s. 40-72(1)
The sale of a depreciating asset results in a
balancing adjustment:
If the Termination Value > Adjustable value =
Assessable gain (s.40-285(1).
If the Termination Value < Adjustable value = Deductible loss (s.40-285(2).
Sale of depreciating assets
The termination value is generally be the
amount received for the asset on disposal or
taken to have received (s.40-300(1) and (s.40-305(1).
The adjustable value is the cost less the total
decline in value up to date of sale (s.40-85(1).
SBE Pools
• There are special rules for depreciating assets
acquired by a small business entity (SBE).
• The simplified depreciation rules for depreciating
assets acquired by small business entity (SBE)
taxpayers on or after 7:30 pm on 12 May 2015 are:
– an immediate 100% deduction applies in respect of
depreciating assets costing less than $20,000 (GST
exclusive); and
– depreciating assets costing $20,000 plus (GST
exclusive) are automatically pooled (gathered together)
and are depreciated in a general small business pool
at the diminishing value rate of 30% per year
(15% Diminishing Value in the first year).
44
What is a depreciating asset?
What do we mean by the term effective life?
45
A machine used in a manufacturing business has
an estimated effective life of 5 years was purchased
on 1 January 2016 for $25,000 and sold on 21
March 2018 for $12,500.
• Prepare the depreciation schedules for both the
prime cost AND diminishing value methods.
• Calculate the assessable or deductible balancing
adjustment.
46
Apply the legislation to determine the availability
and amount of the tax deduction associated with
trading stock balances.
47
Trading stock
s70-10 Trading stock includes:
(a) anything produced, manufactured or
acquired that is held for purposes of
manufacture, sale or exchange in the
ordinary course of a business; and
(b) live stock.
Trading stock
Trading stock does not include:
• standing or growing crops, timber or fruit – these
only become trading stock when they are
harvested, felled or picked
• stocks of spare parts held for repairs or
maintenance to plant and equipment
• consumables used in manufacturing trading
stock, such as cleaning agents or sandpaper.
Trading stock
Income from sale of trading stock is assessable
under s.6-5(1) – income from a business.
• Purchase of trading stock is deductible
under s.8-1(1). It is not capital (s.70-25).
• Opening and closing stock accounted for
pursuant to s.70-35.
Trading stock
Compare the values of trading stock on hand at
the start of the income year and at the end of
the income year (s.70-35(1)).
• If closing stock is greater than opening stock, the
excess is assessable income (s.70-35(2)).
• If opening stock is greater than closing stock,
the excess is an allowable deduction (s.70-35(3)).
What is trading stock?
How is trading stock dealt with for tax purposes?
52
Lincoln is an Australian resident for the full year
aged 30. He conducts a business as a sole
trader as a video game designer and retailer.
During the 2016/17 year he had trading stock
purchases of $275,000.
The value of the opening stock on 1/7/16 was
$72,200, and the closing stock on 30/6/17 was
$92,300.
• Calculate Lincoln’s trading stock deduction.
53
- ACC 304�Taxation Law
- �COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Specific deductions: s8-5
- Tax related expenses: s25-5�
- Lindsay v FCT�
- Law Shipping Co Ltd v IRC�
- 25-25 Borrowing Expenses�
- 25-25 Borrowing Expenses: Example�
- Bad debts (s. 25-35)�
- �Travel between workplaces (s. 25-100)�
- Tax losses of earlier income years: Div 36
- Capital allowances – Division 40 Deductibility of capital expenditure
- s40-25 Deducting amounts for depreciating assets
- �SBE Pools�
Learning objectives
Learning objective 1
Tax related expenses: s25-5
Learning objective 2
25-10 Repairs
25-10 Repairs
25-10 Repairs
W Thomas & Co Pty Ltd v FCT: Facts
W Thomas & Co Pty Ltd v FCT: Held
Class activity 1
Learning objective 3
25-25 Borrowing Expenses
25-25 Borrowing Expenses: Example�
Class activity 2
Learning objective 4
Pre workshop question 1
Learning objective 5
Learning objective 6
Tax Losses: General
Pre workshop question 2
Class activity 3
Learning objective 7
s40-30 What a depreciating asset is
What is the relevant value?
What is the relevant value?
When does depreciation start?
How is the deduction calculated
Decline in value under PCM
Decline in value under DVM
Sale of depreciating assets
Sale of depreciating assets
Pre workshop question 3
Class activity 4
Learning objective 8
Trading stock
Trading stock
Trading stock
Trading stock
Pre workshop question 4
Class activity 5
ACC
30
4
Taxation Law
Workshop 1
Taxation
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on
behalf of Kaplan Business School pursuant to Part VB of the
Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under
the Act. Any further reproduction or communication of this material by
you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business
School and other materials copyrighted by K. Sadiq et al. 201
7
,
Principles of Taxation Law, Thomson Reuters
Do not remove this notice.
Academic misconduct refers to any form of dishonesty by a student relevant
to the student’s learning experience at Kaplan. It includes but is not limited to:
– any attempt by a student to submit work for an assessment that is not their own
(e.g. plagiarism, paraphrasing, non-referencing, ghost writing)
– the reuse of significant portions of one’s own work, previously submitted for
assessment in another subject or course, or for a different question in the same
course without acknowledging that one is doing it (self-plagiarism)
– any form of collusion between students or other individuals other than authorised
collaboration
– any act that may impair or hinder the learning or assessment performance of others
– any action contrary to the study, assessment and examination instructions given by
Kaplan
– assisting or attempting to assist any other student to act dishonestly in relation to
an assessment or part of an assessment.
Plagiarism refers to:
– any use or attempt to use the work, words or ideas of
others without attribution of the author, or
– any attempt to pass off the work, words or ideas of others
as the writer’s own.
Plagiarism also extends to reusing significant portions
of one’s own work, previously submitted for a different
assessment without acknowledging that one is doing it.
This is known as self-plagiarism.
Collusion occurs when a student works with others, contrary to
Kaplan’s instructions, in an attempt to gain an unfair advantage
in an assessment task.
Collusion includes:
– joint effort in an assessment (unless it is authorised collaboration)
– copying of material prepared by another person for use in an
assessment
– undue assistance from any other person in an assessment
– making assessment answers or material available to other students for
viewing or copying, either knowingly or unknowingly. It is the
responsibility of students to ensure their assessment material is secure
and not easily accessible to other students.
Contract cheating, otherwise known as ghost writing, occurs when a student
engages (or attempts to engage) the services of another individual to author
an assignment on the student’s behalf. A student can be guilty of contract
cheating irrespective of whether payment is made or the services are
received.
A student may be investigated for contract cheating where:
• the student posts an advertisement seeking a ghost writer.
• a ghost writer forwards correspondence to Kaplan regarding a student’s
enquiry.
• a student submits work that is significantly different in style to the student’s
prior work.
Students to present their answers to
questions 1, 2 & 3.
Discuss the key political and social features to
be considered in the development of a
successful taxation system.
7
Taxation is the social process by which the
Government uses its power to enforce its right
to collect tax from taxpayers and use it to pay
for governments services and policy agendas.
1. What do you think are the key aspects of
successful taxation system?
2. Develop your own definition of taxation
• Between the world wars there were two
income tax systems State and Federal
• In 1942 it was agreed only the Federal
government would have income taxing rights.
This simplified the system.
• The states retained taxes like stamp duties
and payroll taxes.
• Municipal governments also levy taxes called
rates.
Recognise the existence of different tax bases
and discuss their relative merits
13
The Australian tax system is a mix of direct and indirect
taxes levied by all tiers of government governments.
• Direct taxes are taxes levied directly on the entity and
include income tax and personal property taxes.
Income taxes cover personal income tax, company tax and
capital gains tax (CGT). Examples of personal property
taxes are land tax (a State Government tax) and municipal
rates on owner-occupied premises.
• Indirect taxes are taxes levied on transactions. They
include GST (a Federal consumption tax based on Value
added), Luxury Car Tax, Stamp Duty, Customs and Excise
duties.
Refer to the 4th reading in the Preparation Guide for this topic
https://www.abc.net.au/news/2015-04-06/steketee-our-
missed-opportunity-to-tackle-wealth-inequality/637
22
10
Consider the following questions:
1. Do you think an income tax is the best way to collect
revenue in a world of rising wealth inequality?
2. Develop 2 points in favour of income tax and 2 points in
favour of a wealth tax
“Modern taxation in its most characteristic
aspect is a group struggle in which powerful
interests vigorously endeavor to rid
themselves of present or proposed tax
burdens. It is first of all a hard game in which
he who trusts wholly to economics, reason
and justice, will in the end retire beaten and
disillusioned. Class politics is of the essence
of taxation” – Thomas Sewell Adams
1. Do you believe there is a social class element
in taxation?
2. Can you think of any examples of a powerful
group looking to lower their tax burden?
3. If you were in a position where you had great
wealth and paid no tax would you be willing
to pay tax?
Identify the key aspects of good taxation design
and analyse a tax using the design principles
18
There is tension between the theoretical design
features of good tax policy and the political reality
of tax
Theoretically a good tax is:
• Efficient
• Equitable (Vertical and horizontal)
• Easy to administer
• Simple, and
• Able to raise revenue
Efficient
Should not create distortions in the market. Can you think
of some distortions currently being created?
Equitable
Progressive in nature (that is the vertical aspect that has
resulted in most countries. The opposite is regressive).
Also taxpayers on the same income have the same tax
burden (that is the horizontal aspect)
Easy to administer
The cost to collect the tax should be only a very small
proportion of the tax revenue itself.
What do these terms mean?
Simple
Rules and legislation should be clear and
accessible
Raises revenue
Should be accepted as part of the social
contract and not be able to be avoided
Identify the tax paying entities in the Australian
taxation system, calculate taxable income, tax
assessed and the balance of a tax assessment
22
The first question is:
Who pays tax under the Australian system?
Examples of entities that pay tax:
• Individuals
• Companies
• Superannuation funds
24
Examples of entities that do not pay tax:
• Sole trader business
• Partnership business
• Exempt bodies
Why don’t these entities pay tax?
Exempt bodies pay no income tax. Sole tradership and
partnership businesses do not however get away with no
income tax burden. The onus for paying income tax is
transferred to the taxpaying individuals who share the
profits and losses of those entities
Apply the basic tax equation to calculate taxable
Income: s4-15 ITAA97
Taxable Income = Assessable Income less
Allowable Deductions
The tax process – Assessment
Income Tax liability = Basic income tax liability + Medicare
and other levies/liabilities – PAYG credits – Tax offsets
Basic tax liability = Taxable income x Tax rate, s4-10(3) ITAA 97
The tax rate is determined by the Income Tax Rates Act 1986 (ITRA) and is a
progressive system with imposition rate increasing tax bracket by tax bracket (see
following slide)
Medicare levy = Currently 2% of taxable income
Pay as you go (PAYG) credits. These amounts reduce income tax payable:
• PAYG withholding (e.g. tax deducted by one’s employer or bank)
• PAYG instalments (amounts paid by taxpayer to ATO in advance). This used to be
called provisional tax and exists because the taxpayer gains all or part of their
assessable income from business activities e.g. a consultant who works for himself
but is not incorporated)
Tax offsets – These amounts also reduce income tax payable. Examples
• Low income tax offset
• Low-and-middle income tax offset
• Superannuation contributions made on behalf of one’s spouse (see Appendix 1 for
conditions)
• Franking credits on dividends received (franking credits are first
however included in Assessable Income)
27
Resident Tax Rates in Financial Year 2019-2020
Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000
$90,001 – $180,000 $20,797 plus 37c for each $1 over $90,000
$180,001 and over $54,097 plus 45c for each $1 over $180,000
• Rodney is an Australian resident adult employed by the Australian Red
Cross. His gross salary for the income year ended 30 June 2020 is $85,000,
from which The Red Cross withheld tax instalments totaling $20,872.
• Rodney has a share portfolio which has generated franked dividends of
$10,000 and franking credits of $4,286 in 2019-2020. Rodney did not have
all the money to invest in his share portfolio and borrowed some of the
funds. He incurred interest expenses of $9500 on the loan taken out to
purchase the shares as well as bank charges of $250 on the loan account in
2019-2020. The loan was only used for share investing.
• Rodney had no tax deductions other than the ones above
• Rodney’s spouse earns about $25,000 a year as a part-time school-teacher.
Rodney made superannuation contributions of $5,000 on behalf of his
spouse into a complying superannuation fund and will receive a tax offset in
2019-2020. The rules are set out in Appendix 1. The full tax offset will be
applied as all conditions were met
Class activity 4
Required
(1) Is Rodney a taxpayer entity? What section of the ITAA97 determines
whether she is a taxpayer entity?
(2) Which section of the ITAA97 defines the basic tax equation?
(3) Under which section of which Act is income tax imposed on Rodney?
(4) Calculate Rodney’s taxable income.
(5) Which section of which Act determines the rate of income tax to be
paid by Rodney?
(6) Calculate is the amount of Rodney’s “basic” income tax liability
(7) How will Rodney’s entitlement to a deduction for superannuation
contributions to his spouse’s complying superannuation fund work?
(8) How will franking affect Rodney’s tax liability?
(9) How will PAYG income tax instalments withheld from Rodney’s salary
be taken into account?
(10) Calculate Rodney’s final income tax liability. Exclude any Low
Income and Low and Middle Income Tax Offsets he may be entitled to
Appendix 1 – Superannuation contributions
on behalf of your spouse (from ATO website)
You are entitled to a tax offset of up to $540 for 2019–20 if:
• the sum of your spouse’s assessable income (excluding any assessable
First home super saver released amount), total reportable fringe benefits
amounts, and reportable employer superannuation contributions was less
than $40,000
• the contributions you made on behalf of your spouse were not deductible
to you
• the person was your spouse when you made the contribution
• both you and your spouse were Australian residents when you made the
contributions
• you and your spouse were not living separately and apart on a permanent
basis when making the contributions, and
• your spouse did not have:
– non-concessional contributions totaling more than their non-concessional
contributions cap for 2019–20, or
– at 30 June 2019, a total superannuation balance of $1.6 million or more
30
- ACC 304�Taxation Law
- �COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Slide Number 28
- Appendix 1 – Superannuation contributions on behalf of your spouse (from ATO website)�
Academic misconduct
Plagiarism
Collusion
Contract Cheating
Questions before workshop
Learning Objective 1
What is taxation?
Sources of revenue 2016-17
Where the revenue is spent
Class activity 1
Australian tax history
Learning Objective 2
Types of taxes
Class activity 2
The class nature of income tax
Class activity 3
Learning Objective 3
Characteristics of a good tax
What do these terms mean?
What do these terms mean?
Learning Objective 4
Who pays tax?(s4-1 ITAA97)
Who does not pay tax?
The tax process – Assessment
The tax process – Assessment
Class activity 4
Class activity 4
ACC 30
4
Taxation Law
Workshop 2
and Source
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on
behalf of Kaplan Business School pursuant to Part VB of the
Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under
the Act. Any further reproduction or communication of this material by
you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business
School and other materials copyrighted by K. Sadiq et al. 2017,
Principles of Taxation Law, Thomson Reuters
Do not remove this notice.
Chapter
Reference
• Please read preparation
guide for references for
this weeks topic
Recommended
Text
• Principles of Taxation Law 2020 by K
Sadiq (General Editor), et.al.
• There is no prescribed text
Tutorial
• Workshop 2 Preparation Guide
10
4
Question 1
a. Does everyone and every business in
Australia pay tax?
b. Do you think it matters if the taxpaying entity
is closely associated with Australia?
In order to assess to taxation the Commissioner
of Taxation (COT) must show a number of
elements. The COT must:
1. Identify the taxpayer and show the taxpayer is a
taxpaying entity
2. Determine the residency status of the taxpayer
and determine the source of the relevant income
to establish jurisdiction to tax
3. Determine the amount is assessable income
4. Determine when the amount was derived
• Discuss the key aspects of the 4 residency
tests for individuals applied by the ATO
• Apply them to a set of facts to determine
residency for tax purposes.
5
Residency
• Residency for tax purposes refers to the status of the
taxpayer in terms of tax rules only and has nothing to
do with other determinations such as for immigration.
• Residency has a number of tax implications.
• An Australian Resident is assessed on income derived
from all sources s6-5(2) & s6-10(4).
• Non-residents are taxed only on Australian sourced
income s6-5(3) & s6-10(5), but at higher rates.
The source rules refer to determining the origin
of the relevant income.
• Different types of income have different sources
• The interaction between residency of the
taxpaying entity and source of the funds
determines whether the COT has jurisdiction and
therefore the individual’s exposure to tax in
Australia
Resident is defined in s.6(1). There are four tests within
that definition:
• the “resides” test
• the “domicile” test
• the 183-day rule, and
• the superannuation test
Only one of these tests needs to be satisfied to
be a resident of Australia for tax. Consider each
test in the order it appears.
Resides is not defined in the 1936 Act. Courts
have relied on a dictionary definition of ‘reside’
• ‘To dwell permanently or for a considerable
time, to have one’s settled or usual abode, to
live in or at a particular place.’ (The Shorter
Oxford English Dictionary).
• A question of fact and degree.
• In other words, each case must be decided on
its own merits (FCT v Miller 7(1946) 8 ATD
146
• Physical presence in Australia during the year of income.
• Intention as to length of stay in Australia
• Actual stay in Australia
• Purpose of stay in Australia
• Frequency, regularity and duration of visits
• Maintaining a place of abode in Australia during absences.
• Family & business ties to Australia
• Present habits and mode of life.
See also TR 98/17 (for guidance only – it is not the law).
The factor with most weight is physical presence
No one factor on its own is determinative.
It is possible you could be in Australia for a year
and not be
a resident for tax purposes
Equally you could not be in Australia for a year
and continue to be a resident for tax purposes
No, I am not!
Remember, you need to consider all of the facts
in the case, identify the relevant legislation and
consider the case law in the area to make your
decision.
Residency can be a very complex area – taxpayers
may try to argue they are not residents if looking
to avoid exposure to Australian sourced income
a. Can you think of a situation where a person
might be physically in Australia and NOT
considered to be a resident for tax purposes?
b. What factors did you consider in your
situation?
Test 2 –
What is a domicile?
• An old legal concept Udny v Udny (1869)
http://www.uniset.ca/other/css/LR1ScDiv4
41
.html
• A person’s domicile is the place the common law
considers to be their permanent home.
• Requires physical presence and an intention to
stay permanently or indefinitely.
• By law every person must have a domicile, but
can only have one domicile at any time
http://www.uniset.ca/other/css/LR1ScDiv441.html
Domicile test
There are 3 types of domicile
Domicile of origin: The domicile of the person’s
father at the date of their birth, which he/she will
retain until they acquire a domicile of choice.
Domicile of choice: The place that a person
intends to make their home indefinitely.
Domicile of dependency: Minors and mentally
incompetent persons will have their domicile
determined by their parent or carer’s domicile.
• A solicitor transferred to Port Vila in the New
Hebrides on 8 November 1971 to set up a branch of
a legal firm. (The archipelago gained independence on 30
July 1980 and from then on was known as Vanuatu)
• The solicitor was transferred for an indefinite period,
but he was always going to return to Australia
• He left no assets in Australia, gave up the lease on a
Sydney flat, retained Australian health fund
membership and he and his wife returned to
Australia to give birth to a child.
FCT v Applegate
• He leased premises in Port Vila, obtained
resident status, and was admitted to practice
law.
• He originally intended to be overseas for an
indefinite period, but he returned to Australia
after two years due to ill health.
• The court held that the taxpayer could not be
considered to be residing in Australia, as he
was not physically present.
Domicile test
Does the taxpayer have a ‘place of abode’
outside Australia?
In Applegate’s case the FCT tried to argue that
he did not have a permanent place of abode
outside of Australia.
The issue was whether the place of abode
outside Australia was ‘permanent’ as required by
the domicile test?
Domicile test
Is the place of abode ‘permanent’?
Court held ‘permanent’ means “more than simply
temporary or transitory, but less than everlasting”.
Because his stay was indefinite, it was more than
temporary and less than everlasting. The taxpayer
met the interpretation of permanent and therefore
was not a resident of Australia for the period in
question.
• As the taxpayer was a non-resident for tax
purposes, he could only be assessed on
income sources in
Australia.
• The income earned from his activities in
Port Vila were therefore not assessable to
Australian tax.
• Similar facts to Applegate, but the taxpayer agreed to a fixed
term of 3 years.
• Returned due to ill health after 18 months similar to what
happened in Applegate
• The Tax Commissioner tried to argue that the family’s abode
in the New Hebrides was not a permanent one and thus the
revenue earned by Jenkins in the New Hebrides was subject
to Australian tax.
• The court however decided that Jenkins had a “permanent place
of abode” outside Australia despite no evidence of a decision or
declared wish on Jenkins’ part to try to stay indefinitely. The court
argued that the agreed term did not make the stay temporary.
• That meant that the revenue earned in the New Hebrides was
not subject to Australian tax.
21
• Taxpayer transfers to the New Hebrides for
fixed 2-year period with wife and children on
the condition he and his family were returned
after 2 years.
• The Court said the place of abode was not
permanent as it was not enduring and lacked
durability of association.
22
Billy Orange was born in Adelaide and usually resides in
Adelaide with his family.
For 6 months in the 2015/16 year and all the 2016/17 income
year he and his family have been living in Samoa. The
children attend the local school and his wife works in the local
shop while he works on a fishing boat.
They bought a house in Samoa and have stayed in the one
place.
Is Billy a resident of Australia in the 2016/17 year?
Test 3 :
A person will be a resident for tax purposes if physically
present in Australia for more than half an income year
and the COT must be satisfied that both:
• the person’s usual place of abode is not outside
Australia and
• the person does intend to take up residence in
Australia.
Note the standard here is “usual” as opposed to
permanent under the second test.
Also note the “and” means both the usual place of
abode and the no intention elements must be met.
“183-day test”
Consider the working holiday maker on a 12-month
working holiday
More than 183 days
Usual place of abode not outside Australia
Intention to stay
a resident for tax purposes
“183-day test”
Consider the working holiday maker on a 12
month working holiday
More than 183 days
Usual place of abode not outside Australia
X Intention to stay
Not a resident for tax purposes
Hans Kruger has been living in Queensland for 10
months in the 2016/17 financial year. He usually
lives in Germany and is in Australia working at
various mining sites throughout Queensland. He
has a 12 month visa and at the end of the 12th
month he intends to return to Germany and study
mining engineering using the skills he has gained
through working.
Is Hans a resident under the 183 day test?
• A person is a resident if he or she is a member
of the superannuation scheme for
Commonwealth public servants. This also
includes the person’s spouse and children.
• The effect is to ensure the employee and their
families remain Australian residents for tax
purposes if posted overseas.
Discuss the key aspects of the 3 residency tests
for companies
29
There are 3 tests in paragraph (b) of the
definition of resident in s. 6(1).
Only one of these tests needs to be satisfied
for a company to be a resident of Australia
for tax.
Consider each test in the order it appears.
Residency of companies
• Incorporation Test.
• Central Management and Control Test.
• Controlling Shareholder Test.
A company is an Australian resident for tax if it is
incorporated
in Australia.
Easy!
Test 2 –
test
A company is an Australian Resident for tax if it:
• Carries on business; and
• Has its central management and control
in Australia.
Note that both points need to be met for
residency if this test is being applied
Central management and control
Not defined in the legislation so relevant principles have
emerged from case law.
Relevant factors include:
• Where directors meet to do business (the “brains” of the
business)
• Where the real business activities are undertaken (day-to-
day decisions made)
• Location of registered offices
For trading activities a company will be a
resident of Australia for tax if it:
• Carries on business in Australia; and
• Has its voting power controlled by shareholders
who are residents of Australia.
Both elements need to be satisfied for residency if
this test is being applied.
The four tests for individual taxpayers are
alternatives and only one has to be satisfied for a
person to be considered a resident for Australian
tax purposes.
The three tests for companies are also alternatives
and only one needs to be satisfied for a company
to be considered a resident for Australian tax
purposes.
• Determine the source of various types of
income and the interaction with residency
status to determine whether the COT has the
jurisdiction to tax.
37
Source is not a legal concept and there is no
definition of it in the Income Tax Assessment Act.
Non-residents taxed only on Australian sourced
income.
Residents are taxed on their worldwide income
Courts have looked at the substance of the
arrangement rather than its legal form.
There are a series of general rules determining the source of
different types of income:
• Income from Personal Services – where the services were
performed
• Business/trading income – where the trading activities take
place
• Real Property – where the real property (rented or sold) is
located.
• Dividends – where the company paying the dividends made
the profits from which the dividends were paid
• Interest – where the loan contract is negotiated and made
• Royalties – where the know-how is located
Gregory Power is a highly regarded baseball prospect. During the
American off season he first travelled to Mexico to play in the Fall League
for 2 months and then decides to come to Australia and play in the
Australian Baseball League in December, January and February to play
for the Adelaide Chomp. He signs the contract in Switzerland, which
stipulates he is to be paid $45,000 for the 3 months. He joins the team
shortly after. The contract states he is to be paid monthly into a bank
account in the Turks and Caicos Islands. Gregory is impressed with
Australia and decides to purchase a home unit at Glenelg. His plan is to
use it as a base during the home and away series and rent it out for the
remainder of the income year. Discuss with reference to the residency
tests and source rules whether:
• Gregory is liable for taxation on the $45,000 for his baseball skills
• Gregory is liable for tax on the rental income received during the
balance of the year
Explain the wider implications of residency
status
41
• Residence is important in determining the liability to Australian
income tax for residents of Australia and residents of foreign
countries.
A resident individual of Australia for tax purposes is entitled to:
– the tax-free threshold in whole or part
– tax offsets e.g. franking credit tax offsets on dividends received
– an exoneration of 50% of the CGT on asset disposals provided the
asset was held for 12 months.
• Only resident companies can apply the imputation system meaning
that they can get the benefits of franking credit tax offsets on
dividends received.
- ACC 304�Taxation Law
- �COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Test 2 – Domicile test
- Test 3 : “183-day test”
- Test 2 – Central management and control test
Workshop 2 references
Questions before workshop
Exposure to taxation
Learning Objective 1
Residency
Jurisdiction = Residency and Source
Determining residency for Individuals
Test 1 – Resides Test
Relevant factors
However
You have got to be kidding!
Class activity 1
Domicile test
FCT v Applegate
FCT v Applegate
Domicile test
Domicile test
FCT v Applegate –Outcome
FCT v Jenkins
Case Q68 83 ATC 343
Class activity 2
“183-day test”
“183-day test”
Class activity 3
Test 4 – Superannuation test
Learning Objective 2
Residency of companies
Residency of companies
Test 1 – Incorporation test
Central management and control
Test 3 – Controlling shareholder test
Residency outcome
Learning Objective 3
Source of income
Source rules
Class activity 4
Learning Objective 4
Why residency matters
ACC 304
Taxation Law
Workshop 8
and Trust business
structures
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on behalf of
Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under the Act.
Any further reproduction or communication of this material by you may be the
subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business School and
other materials copyrighted by Thomson Reuters, Principles of Taxation Law
2017 edition.
Do not remove this notice.
Learning Objectives
• Determine if a taxpayer is in business
• Understand the fundamentals and tax treatment of
partnerships
• Understand the fundamentals and tax treatment of trusts
•
Understand/classify the income of minors
Determine if a taxpayer is in business.
There are 4 main business structures in Australia:
• Sole trader
• Partnership
• Trust
• Company
Each have their advantages and disadvantages
and the choice of structure will influence the tax
outcome.
Business structures
Income from
a business
’s core trading activities
is assessable as ordinary income as it is in the
ordinary course of business (s.6-5(1), Harris).
The business may also be able to claim general
or specific deductions against the trading
income.
The business may also include other assessable
amounts as discussed earlier.
• Under S6-5, ordinary income includes income from
carrying on a business. The existence of a business
activity is relevant for determining whether:
• the receipts of the business are income and deductions
can be claimed;
• or whether they are private receipts derived from a
hobby (no income or deductions to be claimed).
Any profession, trade employment, vocation
or calling, but not the activities of an
employee (s.995-1).
The Courts have developed guidelines. A
question of fact and degree and each case
must be decided on its own
circumstances.
• Hobbies are usually done for fun, not for
profit.
• Hobby activities are usually performed by
individuals in their spare time.
• Hobbies are usually quite small in scale.
Whether or not a taxpayer is carrying on a business is a
question of fact. The courts have developed a number of
relevant characteristics for a business activity,
remembering no one factor determines your in business:
(Ferguson v. FCT)
• Is the activity is conducted in an organised and systematic
way?
• Is there continuity and repetition of transactions?
• Is there a profit motive?
• Does the activity has significant commercial character?
• What is the scale of operations?
• Max runs a coffee shop on weekends only (2 days per week). He
sells coffee to the public at $6 per cup. The coffee is the best in
the world and imported from Peru.
• Max has staff to assist him during the busy period of the day. He
records all takings using MYOB. Max has an A.B.N. Max is not
registered for the GST. Is Max in Business?
Understand the fundamentals and tax
treatment of partnerships.
Partnership
• According to Section 995-1 of the ITAA (1997), a
partnership is defined as: “an association of persons
carrying on business as partners or in receipt of ordinary
or statutory income jointly but does not include a
company.”
• A partnership is not a separate legal entity in general law
and does not pay tax of itself (s91).
• The partnership shall furnish a tax return of the income
of the partnership (s.91) which will show the profit or loss
and the distribution to each partner.
• The partners pay tax on the profits distributed to them.
• The tax law extends the definition of a partnership by
including those taxpayers in receipt of income jointly.
of this is joint owners of a rental property,
shares, bank accounts etc are considered partners and
each declares an amount of the income.
• The ATO’s default position is the income is shared
equally between the partners.
• Only lodge a partnership return if carrying on a business.
As the partnership is not a separate legal entity it
does not have taxable income. The partnership
has:
• Partnership Net Income (PNI) defined in s90 as
assessable income except net capital gains
• Income calculated as if the partnership was a
resident taxpayer less all allowable deductions
except personal superannuation contributions
and tax losses of earlier years.
• A partnerships net income or loss is calculated by deducting from
assessable income all deductions available under the Income Tax
Assessment Act with a few exceptions. In other words, the normal
rules for income and deductions generally apply.
• Refer to Partnership Readings 4.0
• See example at Partnership Readings 5.0
• Interest on the capital of a partner is treated in the
same way as payments of “salary”. Any payment
of capital interest to a partner is merely an allocation of
profit prior to the general division among the partners. It
is not, therefore, an allowable deduction in arriving at the
net income of the partnership
• Interest on money lent by a partner to the partnership
as distinct from interest on capital is an allowable
deduction for the partnership provided the principal
moneys are used by the partnership in producing its
assessable income. The interest received by the partner
from the partnership is assessable income of that
partner.
• Partnerships do not make capital gains for tax. The
individual partners need to declare any net capital gain in
their tax return commensurate with each partner’s share
in the ownership of the business.
– Each partner’s capital gain or loss is worked out with
reference to the partnership agreement or general
partnership law if no agreement s106-5(1)
• An interest in a partnership asset is a CGT asset in its
own right (s.108-5(2)(c)).
Outline a partnership structure.
How are losses treated within a partnership
structure?
Students are to provide an example.
Class activity 2
• Matt and Mark are partners in a florist shop. After all
expenses, the accounts show a profit of $95,000 for the
year ended 30 June 2018. This is after allocating $90,000
to Matt and $35,000 to Mark in salaries. The profit of the
practice after salaries is to be split evenly. There is no
interest calculated on capital accounts but each partner
(as individual taxpayers) had an outstanding loan to the
partnership generating interest of $5,000. These loans
were needed to drive growth in PNI over time.
Question 1: How much will need to been included in the
assessable income of each partner?
Question 2: Would it make a difference if the salaries
had not been physically paid to each partner?
Understand the fundamentals and tax
treatment of trusts.
Trusts were not interesting from a tax perspective until the late
1960’s. Prior to this point their primary role was asset
protection and succession planning and they were highly
restricted in terms of the riskiness of the investments they
could make. Then these rules were relaxed
There are many different types of trusts – we are most
interested in the discretionary trust in the tax/commerce
field. The discretionary trust allows great flexibility in the
distribution of amounts to achieve the best overall tax
outcome.
The various elements to a trust :
• Trustee
The trustee is the legal registered owner of the trust property. The
trustee may manage a business. A trustee can be a natural person or a
company. The trustee can be sued.
• Trust Property
The trust property refers to the property (assets) of the trust. This may
be a business or real property.
• Beneficiaries
The beneficiaries have the beneficial interest in the trust property. For
example, the beneficiaries of a family trust are Mum, Dad, Children and
other relatives in most cases.
• A Fiduciary Obligation
The trustee has a fiduciary obligation to act in the best interests of the
beneficiaries. These duties, obligations and powers are usually found in
the trust deed.
There are 3 common types of trusts:
• Discretionary Trusts
This type of trust gives the trustee the power to determine which
beneficiaries are entitled to distributions of the income and/or capital of
the trust. This can change from year to year. Each year, the trustee
decides how much of the net income of the trust to distribute to each
beneficiary. A discretionary trust is commonly called a family trust.
• Fixed Trusts
A fixed trust is a trust where the beneficiaries’ entitlements to a share in
the income or capital of the trust are fixed according to the trust deed.
Beneficiaries receive a fixed percentage of the net income of the trust
estate.
• Unit Trusts
A unit trust is a subcategory of fixed trust. Unitholders have a fixed
entitlement to the income and capital of the trust based on the number
of units held. For example. A unit trust may have 100 units. If Mark has
50 units and Max has 50 units, then they are entitled to 50% each of
the net income of the trust estate.
Trusts have the following characteristics:
• Not a separate legal entity but must lodge
a taxation return.
• Has assessable income and deductions.
• Profits are distributed to each beneficiary.
• Losses are trapped in the trust and carried
forward
Quite complex but briefly:
Division 6 ITAA 1936 has 2 roles.
1. Calculate net income
2. Determine who is assessed.
1. Broadly, the “net income” is calculated in much the same
way as a resident taxpayer.
2. To determine who is assessed, you must first determine
whether each beneficiary is under a legal disability and
presently entitled to a share of the net income of the trust
estate.
Taxation of Trusts
Legal disability
• a minor who is under the age of 18 on the last day of the
year of income;
• a bankrupt; or
• an insane or mentally incapable person.
Present Entitlement
• a beneficiary is presently entitled to a share of the net
income if they have a right to demand and receive
immediate payment of their share of the net income.
Name the various parties to a family trust
arrangement.
Give examples of who these parties may be
in real life.
• The Federal Labour Party has released policy
that will have implications on family trusts. What
are they and want impact would they have if
successfully implemented?
• In your opinion, should this legislation be
implemented. Discuss.
• Please refer to this document
Labour family trust plan
Bill Shorten’s family trust tax plan unveiled: What it could mean for small businesses
Understand/classify the income of minors
• Special rules exist to discourage income splitting to
minors. Otherwise, taxpayers would give their 2 year old
child $18,200 every year.
• These rules are found in Division 6AA ITAA 36 and were
introduced to discourage income-splitting to children.
• 3 key terms: prescribed person, eligible taxable income
and excepted assessable income.
Section 102AC(1) ITAA 36: a “prescribed person” is any person under 18
years of age at the end of the financial year. These persons are referred to as
“minors”.
Eligible Taxable income: The associated taxable income is taxed at the Division 6AA
rates
: The associated taxable income is taxed at ordinary
rates
• Division 6AA reduces the prescribed person’s tax-free threshold from
$18,200 to $416. And then taxes their eligible income at 45% (apart from the
66% for the small branch between $417 to $1,307).
• So eligible income is basically taxed at an adult’s top marginal tax rate
without the $18,200 threshold (see adult rates in appendix), removing any
incentive to shift income from an adult to a child.
Table: Tax rates for residents who are under 18
Income Tax rates for 2018–19 income year
$0 – $416 Nil
$417 – $1,307 Nil plus 66% of the excess over $416
Over $1,307 45% of the total amount of income that is not excepted income
If an amount is not excepted assessable income it
is eligible assessable income s102AE(1).
Eligible assessable income is subject to the Div
6AA rates.
Examples of eligible assessable income include:
• Distributions from family trusts or partnerships
• Income from gifts of money or property
• Generally amounts received but not earned
Excepted assessable income
Excepted assessable income is essentially
amounts the minor has earned themselves,
earnings from the investment of these amounts
and other amounts specified in the legislation.
Examples include:
• Employment or business income s102AE(2)(a)
• Taxable payments from Centrelink
• Income from a deceased estate
• Business income where the minor is carrying on
a business
The effect
The effect is a minor at school with a part time job
will be a prescribed person receiving excepted
assessable income and so this receipt is not
subject to the Div 6AA rates.
If they also receive a distribution from a family
trust, this amount is eligible assessable income
and is subject to the Div 6AA rates. (see slide
44)
The effect
• This means two calculations are necessary to
determine the overall tax assessed. Each receipt
received by the minor needs to be classified
appropriately, unless they are an excepted
person.
• If they are an excepted person all of their income
is excepted assessable income.
John, a resident, aged 16 at 30 June, earns the
following amounts during the year:
• Wages (KFC) $8,000
• Term Deposit Interest (Deposit from Grandfather)
$2,000
• Bank account interest (Savings from wages)
$350
• Distribution from family trust $10,000
Determine the tax treatment of the above amounts.
Calculations are not required
Resident tax rates 2019–20 (these were unchanged from 2018-2019)
Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000
$90,001 – $180,000 $20,797 plus 37c for each $1 over $90,000
$180,001 and over $54,097 plus 45c for each $1 over $180,000
- ACC 304�Taxation Law
- COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Learning Objectives�
- Class activity 2
Learning Objective 1
Business structures
Business structures
Business v Hobby
What is a business?
What is a hobby?
Business indicators
Class activity 1
Learning Objective 2
Partnership
Tax law partnerships
Partnerships
Tax treatment of partnerships
Partner Salaries
Other Matters
Partnerships and CGT
Pre workshop question 1
Pre workshop question 2
Learning Objective 3
Trusts
Basic trust structure
Elements
Types of Trusts
Taxation of trusts
Taxation of Trusts
Taxation of Trusts
Assessing provisions
Student discussion
Pre workshop question 3
Class activity 3
Learning Objective 4
Income of minors
Prescribed persons
Eligible assessable income
Excepted assessable income
The effect
The effect
Class activity 4
Class activity 5
Appendix 1 – Resident adult tax rates
ACC 30
4
Taxation Law
Workshop 3
Ordinary Income
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9
WARNING
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Copyright Act 196
8
(the Act).
The material in this communication may be subject to copyright under
the Act. Any further reproduction or communication of this material by
you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business
School and other materials copyrighted by K. Sadiq et al. 2017,
Principles of Taxation Law, Thomson Reuters
Do not remove this notice.
Chapter
Reference
• Please read preparation
guide for references for
this weeks topic
Recommended
Text
• Principles of Taxation Law 2020 by K
Sadiq (General Editor), et.al.
• There is no prescribed text
Tutorial
• Workshop 3 Preparation Guide
10
4
The Income Tax Assessment Act 1936 (colloquially
known as ITAA36) is an act of the Parliament of
Australia. It is one of the main statutes under which
income tax is calculated. The act is gradually being
rewritten into the Income Tax Assessment Act 1997
(= ITAA97) and new matters are generally now added
to ITAA97
Question 1
Is ordinary income defined in either ITAA? Why, or
why not?
Discuss the following comment:
“All individuals and companies need to pay tax
on every receipt of money received throughout
the income year. If you receive any amount of
money you need to pay tax”
• Assessable Income = Ordinary Income +
Statutory Income which is neither Exempt
Income nor Non-Assessable Non-Exempt
(NANE) Income
– Examples of Exempt Income are Australian
Government pensions, allowances and payments.
– Examples of NANE Income are the tax-free
component of an employment termination payment
or a genuine redundancy payment
5
Ordinary Income v’s Statutory Income
• Ordinary Income = Amounts which have
been held to be assessable by the courts
because they demonstrate certain
characteristics
• Statutory Income = Those amounts that the
legislature has stipulated are assessable
• Exempt and NANE income amounts are those
amounts the legislature has stipulated as non-
assessable
6
Which of the following are assessable as ordinary income under
s6-5 ITAA97, and why?
1. Wages and tips received from part-time employment
2. Employer’s present of two tickets to Monster World worth
$300
3. Employer’s present of two non-transferable tickets to Monster
World worth $300
4. Gift of $400 conditional on mowing neighbour’s lawn for three
months
5. An unfranked dividend
6. Weekly compensation payments to a self-employed person
out of a personal disability insurance fund.
• Mason is a professional golfer. He works full-time at a golf
course as one of their resident golf professionals. At times
during the year, he attends professional tournaments
caddying for a few of his professional golfer colleagues.
Mason regularly receives tips in tournaments. Mason has
earned the following in the current income year:
Salary $80,000
Tournament bonuses 8,000
Tips 12,000
In addition to the above, Mason also received a sizeable gift
of $10,000 cash as a thank you for caddying for a winning
player and some golfing equipment valued at $6,000 from
one of his clients at the golf course.
• What is Mason’s assessable income for the current income
year?
8
Taxable income = assessable income –
allowable deductions (see s. 995-1(1) and
s. 4-15).
Assessable income = ordinary income +
statutory income (s. 6-1(1)).
Identify the key indicators/characteristics of
ordinary income
10
The basic principles
Ordinary income is income according to
ordinary customs, concepts and usages
clarified through case law
Statutory income is income as there is a
specific section in the legislation defining it as
income and directing how it is to be assessed.
* It may or may not fail the concept of ordinary
income
There is no definition of ordinary income (OI)
section 995-1(1) of ITAA 1997 refers us to
section 6-5.
“Your assessable income includes income
according to ordinary concepts, which is called
ordinary income.” (s. 6-5(1))
As OI is not specifically defined in the Act we
rely on courts and case law for meaning.
“The word income is not a term or art, and what forms of
receipts are comprehended within it, and what principles
are to be applied to ascertain how much of those receipts
ought to be treated as income, must be determined in
accordance with the ordinary concepts and uses of
mankind…”
Scott v C of T (1935) (NSW)
It follows that most people would consider wages and
salaries as income and those same people would
consider lottery winnings as not. The courts take the
same view by referencing Case Law.
1. Cash or easily convertible to cash
• UK case:
(
18
92) AC 150
• Australian case: FCT V
(1980) ATR 696
2. A real gain to the taxpayer.
A reimbursement of an employee’s travel expenses would represent no “real gain”.
Note that some writers call “1”and “2”above the “pre-requisites
3. Produced directly or incidentally by a revenue producing activity
There a revenue producing intent inferred from the activity
There is a nexus or connection with an earning source, specifically having a nexus
with either property, or a business or personal exertion.
4. Periodic, regular and recurring receipt
Note that sometimes ordinary income is determined despite “3” or “4” not
being present. For example if receipts are regular, expected and the taxpayer is
able to depend on them for support, this will be enough to make them ordinary
income even if they do not flow from an earnings source.
– In Keily v FCT (1983) SASR 494, the Federal Court held that a government age
pension was ordinary income.
– The same logic would apply to many other government benefits.
Tennant v Smith
The taxpayer was an agent for a bank and lived in free
accommodation supplied by the bank. The taxpayer
was not allowed to sublet the accommodation.
The House of Lords held that the accommodation was
not regarded as income as it was neither cash nor
cash-convertible.
Cooke & Sherden
A few taxpayers sold soft drinks door-to-door.
These people received a free holiday from the
soft drink manufacturer due to them selling a
certain number of soft drinks.
The holidays were non-transferable and therefor
could not be sold.
The Federal Court held that because the holidays
were not cash-convertible they were not ordinary
income. This was consistent with Tennant v Smith
(1892)
The principles used to determine an
income receipt
The case law has identified five fundamental principles used
to determine whether a receipt is income in nature. Its nature
is determined:
1. by reference to ordinary concepts and usages
2. by its classification in the hands of the recipient
3. independent of the nature of the payment made from the payer’s
perspective
4. by objective consideration of facts in the case
5. as a question of fact
Identify the 6 major revenue producing activities
and associated concepts from relevant case law
18
Ordinary income can be derived from the following:
•
• Ordinary course of business
• Use and realization of property
• Isolated transactions
•
• Residual sources
Personal exertion
A receipt from personal exertion may be
ordinary income. The relevant factors to
consider are:
• Is there a direct or indirect connection to employment or services
rendered?
• The payment replaces income
• Periodical, regular and recurrent
• Money or convertible into money
• Reasonable expectation payment would be received
• Payment is made under contract or agreement
Personal exertion
• Generally the connection to employment or
services rendered is the most important
factor
• To be considered a result of employment or
services rendered the receipt must have
sufficient connection with the activities
• A sufficient connection exists when an
amount is received directly or indirectly from
the activities (Kelly v FCT 85 ATC 4283)
• If a sufficient connection exists, it is
irrelevant whether the amount is received
from current activities.
Kelly v FCT 85 ATC 4283
Phil Kelly was a professional Aussie
rules football player in WA.
A TV station wanted to publicize its
support of AFL to attract viewers to its
station, so it provided $20,000 for an
award to the ‘best and fairest player’
(the Sandover Medal)
Kelly won the $20,000 prize
(contemporary value: $99,500) in the
1978/79 tax year.
The prize money was held to be
assessable income – there was a
sufficient nexus between the prize and
Kelly’s employment as a professional
footballer
Taxpayer left his employment to enlist in the armed forces during
WWII, but the army did not pay as much as his former employer
did.
His former employer topped up his army pay on a regular basis to
make up the difference.
The Court held the amount to be income as the payments were
really incidental to employment and it is unimportant whether the
payments come from the employer or someone else.
It was also suggested the payments were a substitute for the
previous salary – “ the substitution principle”
What are the 6 main categories of income
producing activities?
• You have a holding of ABC Ltd shares worth $40,000. You
are a resident for tax purposes in Australia. The dividends
are not franked, meaning no franking credits are attached to
them.
• ABC allows shareholders to use a Dividend Reinvestment
Plan and you have elected to participate.
• This means that instead of receiving cash dividends, you will
get a corresponding number of new shares written into the
company’s share register (with the added benefit of paying
no brokerage on the new shares acquired).
• Will the value of the shares credited to you in lieu of
cash be assessable income?
• Please explain your logic.
24
• Consider the situation of a family that has a home loan mortgage
currently with an interest rate of 3.5% p.a.. The balance of the loan
is currently $600,000.
• The same family also has a mortgage offset account with a balance
of $100,000. If this were a traditional deposit account, the interest
rate credited to the saver would be 1% p.a.
• When the bank calculates the monthly interest on the home loan it
splits the $600,000 into 2 components being $500,000 and
$100,000.
• The $500,000 component attracts the rate of 3.5% and the
$100,000 attracts a lower rate of 2.5%.
• Should 1% interest on $100,000 be deemed to be ordinary
income and taxable?
• Please explain your logic.
25
Explain the substitution principle
26
• A receipt takes on the character of what it
substitutes.
• If a receipt is ordinary income under s.6-5, a
receipt substituting for it will also be ordinary
income under s.6-5.
• FCT v Dixon established the substitution
principle.
A receipt from business activities may be income. The
relevant factors to consider are:
1. Does the receipt arise in the course of carrying on business
2. Does the receipt arise in the ordinary course of, or incidental
to, business activities?
3. Is there a profit-making purpose?
4. Is the amount usually regarded as income in the business?
5. Does it replace a revenue or income amount?
6. Regular, periodical and recurrent?
7. Money, or easily convertible into money?
Generally the connection between the receipt and the
business activities is the most important factor
Business activities
• Even if a business is being carried on it does not mean
every receipt will be income (Spedley Securities v
FCT)
• A receipt will be income if it results from a business
activity
• There must be a sufficient connection between the
business activity and the receipt
• A sufficient connection will exist if the receipt arises in
the ordinary course of business activities, or is
incidental to the ordinary course of business activities
“It is quite well settled if an asset is realized in
the course of changing investments the profit
is not assessable to income tax. Equally, the
profit may be assessable if the act is done in
carrying on a business.” ( Californian Copper
Syndicate v Harris(1904) 5 TC 159)(abridged)
There is a difference between amounts on
capital account and revenue account.
Realization of business assets
• If an asset is disposed of in the ordinary course of
business or incidental to the ordinary course of
business it is likely to be ordinary income
• If the disposal of the asset is unrelated to the
ordinary course of business, it is likely to be
considered “mere realization” of the asset and not be
ordinary income (Scottish Australian Mining v FCT).
• The mere realization of an asset may well be
captured under the capital gains tax rules, or the
rules for disposal of depreciating assets
Extraordinary activities are unusual compared to
the transactions undertaken in the ordinary
course of business.
These transactions were commonly viewed as
being on capital and therefore not assessable to
income tax.
One key case clarified the principle: FCT v Myer
Emporium
Show the connection between the substitution
principle and the decision in FCT v Myer
Emporium
33
The case involved assignment of an income stream on
a loan (i.e. interest) to a third party.
• Myer received a lump sum calculated as the present
value of the interest annuity for that assignment.
Myer essentially wanted to argue this amount was
capital, the FCT wanted to assess it as income.
Why does this distinction matter?
FCT v Myer Emporium
• “Generally speaking … if…the taxpayer’s intention or purpose
in entering into the transaction was to make a profit or gain
the profit or gain will be income, even though the transaction
is extraordinary when judged against the taxpayer’s ordinary
course of business.”
• This case is significant as it decided a once off payment not in
the ordinary course of business and not incidental to the
ordinary course of business could be income.
• The Court said the taxpayer’s intention at the time of entering
the transaction could stamp the receipt with the character of
income
FCT v Myer Emporium
The Court decision also reaffirmed the earlier
decision of FCT v Dixon which established the
substitution principle.
The one-off payment Myer received for the
interest payment annuity was substituted for
an income stream and therefore took on the
character of income.
What is the essence of the decision in the Myer
Emporium Case?
Ordinary income receipts can emerge from the use
or realization of property. Ordinary Income from the
use of property includes:
• Periodic receipts such as interest, rent, leases
• Isolated receipts such as inducement payments
(Montgomery v FCT 99 ATC 4749)
Property related activities
Ordinary income from the realization (sale) of property includes:
• Realizations constituting a business
• Realizations from profit making by sale
Ordinary income may not arise from the “mere realization” of an
asset. These activities would now be considered under the
CGT provisions.
At what point does realization of property become a business?
No one point is determinative. All the facts need to be
considered in each case.
In 1954 the taxpayer company acquired 1584 acres of land to secure
access to shareholder’s shacks.
In 1967 all the shares were purchased by an insurance company and 2
other companies controlled by experienced land developers
The articles of association were changed to remove the purpose of
securing access to shacks.
The new structure applied for rezoning. This was successful and led to a
subdivision, development and sale activity.
Taxpayers argued there was a mere realization of assets and therefore not
income therefore an untaxed amount. Note that this was prior to CGT
legislation being introduced.
FCT wanted to say there was a property-related-business and assess the
proceeds as income.
The FCT was successful due to the scale of the activities
Westfield’s business activities were the design,
construction, letting and management of shopping centers.
It acquired a piece of land and planned to develop a
shopping centre but sold the land to AMP who then
engaged Westfield to develop the shopping center.
The FCT wanted to assess as income as this extraordinary
transaction had a profit-making intention in its view.
The court held the profit on the sale was not ordinary
income as the taxpayer had not entered into the transaction
with the purpose of making a profit from selling the land. It
had intended to develop a shopping centre.
Illegal or immoral activities
• Legality/morality is not relevant in determining
whether a receipt is ordinary income
• In FCT v. La Rosa held proceeds from illegal
drug dealing were assessable as ordinary
income as the taxpayer was in the business of
drug dealing.
Windfall gains such as Lottery prizes are received due to pure
chance and have no connection to an earning activity and
therefore are not ordinary income under s. 6-5(1).
Gambling Wins – can be (and have been) assessed as ordinary
income. It has been argued gambling requires knowledge and
skill. Wins only constitute ordinary income under s. 6-5(1) if seen
as proceeds of a business of gambling.
• Generally not assessable as ordinary income
• Regular appearances may change that as well
as unusual skill and knowledge in winning and
appearance fees.
• Prizes related with income producing activities
are likely to be ordinary income, e.g. a cash
prize won by an author for best children’s book
• Purely personal gifts are not ordinary income under s.
6-5(1) as there is no connection to an earning activity.
• Gifts are differentiated from other voluntary payments
connected to an income producing activities (e.g. tips).
• The existence of an employment or services relationship
and a personal relationship creates difficulties.
• In almost all cases, a voluntary payment made in the
course of an ongoing employment or services relationship
will be ordinary income.
• Only in exceptional circumstances will it be a purely
personal gift. Key case: Scott v. FCT.
• Hobbies are personal activities and done for
personal enjoyment or pleasure. Receipts are
not assessable; expenses and losses are not
deductible.
• There is no one point when a hobby turns into
a business all the facts in each case need to
be considered.
The general principle is to look at what the
particular payment is compensating or
substituting.
Payments for the loss of income are assessable
as ordinary income under the substitution
principle (Tinkler v FCT)
Payments for the loss of income earning capacity
are capital (Atlas Tiles v Briers)
Cleavon likes to collect coins. Over the past 15 years he has collected a
large and varied collection. Cleavon decides it is time to have his collection
valued for insurance purposes and is stunned to find it is valued at $1.5m
primarily due to one coin worth $850 000 he picked up for $5 at an auction
15 months ago according to his immaculate records.
• He decides to sell this coin through an online auction to the highest
bidder.
Are the proceeds of this activity ordinary income under s6-5?
• Assume Cleavon saw the coin and knew it was rare and valuable and
bought it with the intention of selling it within 6 months to a collector.
Is the amount received assessable income under s6-5?
What do you see as the critical differences between the two scenarios?
- ACC 304�Taxation Law
- �COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- �The principles used to determine an income receipt
Workshop 3 references
Questions before workshop
Question 2
Ordinary Income v’s Statutory Income
Ordinary Income v’s Statutory Income
Question 3
Question 4
The basic principles
Learning Objective 1
The basic principles
Ordinary Income – basic principles
Income – Case Law
Main characteristics of Ordinary Income
Tennant v Smith
Cooke & Sherden
Learning Objective 2
Income producing activities
Personal exertion
Personal exertion
FCT v Dixon (1952) 86 CLR 540
Class activity 1
Class activity 2
Class activity 3
Learning Objective 3
Substitution principle
Business activities
Business activities
Realization of business assets
Realization of business assets
Extraordinary business transactions
Learning Objective 4
FCT v Myer Emporium
FCT v Myer Emporium
FCT v Myer Emporium
Class activity 4
Property related activities
Property related activities
FCT v Whitfords Beach Pty Ltd
FCT v Westfield
Illegal or immoral activities
Residual activities
Prizes
Gifts
Hobbies
Other compensation payments
Class activity 5
ACC 304
Taxation Law
Workshop 5
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on behalf of
Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (the Act)
.
The material in this communication may be subject to copyright under the Act.
Any further reproduction or communication of this material by you may be the
subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business School and
other materials copyrighted by Thomson Reuters, Principles of Taxation Law
2017 edition.
Do not remove this notice.
Capital Gains Tax
.
Learning Objective 1
Explain the basic CGT concepts
A gain characterised as capital is not subject to income tax under
ordinary concepts.
Capital Gains Tax (‘CGT’) commenced on 20 September 1985 and
brings capital receipts into the tax base. It is not a separate tax. It is a
set of residual provisions designed to determine an amount of
Statutory Income to be included in a taxpayer’s assessable income if
the amount cannot be assessed as ordinary income, or under other
provisions.
A taxpayer’s income tax liability includes
a net capital gain
(being total capital gains less certain capital losses)
Assessable
Income
Ordinary
Income
Statutory
Income
Net Capital
Gain
PoTL 2017 paragraph [11.10]
Overview
• CGT on applies to assets that have been acquired on or
after September 20,1985.
• Residents are subject to CGT on CGT assets located
anywhere in the world whereas non-residents are
subject to CGT only on taxable Australian property
(direct or indirect interests in land, buildings or business
assets).
To determine whether the taxpayer has made a capital gain or
capital loss, the following issues are considered:
1 •
2 • Is the asset a CGT asset?
3 • Is the CGT event/ CGT asset exempt?
4 • Do the special CGT rules apply?
5
• Does a capital gain or capital loss arise from the
CGT event?
PoTL 2017 paragraph [11.30]
Learning Objective 2
Explain the key role of the CGT event
A taxpayer only makes a capital gain or loss if a CGT
event occurs: s 102-20 ITAA97.
Sometimes, more than one CGT event will happen.
Generally, the most specific to the situation is used:
s 102-25(1).
More than 50 CGT events exist. For summary of CGT
events, see s 104-5.
The following key CGT events are covered in these
slides:
CGT event A1 – Disposals (most common event)
PoTL 2017 paragraph [11.40]
Has a CGT event happened?
CGT Event A1 – Disposal of a CGT asset (s 104-
10)
• Occurs when the taxpayer disposes of a CGT asset.
• Time of the CGT event:
• When the taxpayer enters into the contract, or
• If no contract, when ownership change occurs. See, FCT v
Sara Lee Household.
Illustration: Timing of CGT event (and hence capital gain or loss)
will be in the income year ended
30 June X1
Contract signed
30 June X1
Settlement ($)
1 June X1 1 July X1
PoTL 2017 paragraph [11.50]
CGT Event C1 – loss or destruction of a CGT asset (s 104- 20)
• The time of the event is when you first receive compensation for the
loss or destruction or, if there is no compensation, when the loss is
discovered or destruction occurred.
CGT Event D1 – creating contractual or other rights (s 104-35)
• The time of the event is when you enter the contract or create the
other right.
CGT Event K4 – CGT asset starts being trading
stock
(s104-220)
• The time of the event is when you start to hold the asset as trading
stock
Discuss the following comment:
“The disposal of any form of asset will
always result in an assessable amount
under the capital gains tax rules”
Learning Objective 3
Identify the different categories of CGT
assets
Step 2:
Broad definition of a CGT asset. Defined in s 108-5(1) as:
Any kind or property; or
Legal or equitable right that is not property.
Examples include:
• Land and buildings
• Shares in a company
• Bonds or debentures in a company
• Units in a unit trust
•
s costing over $500 (eg stamp collection)
• Personal use assets costing over $10,000 (eg boat)
• Contractual rights (eg restraint of trade)
• Business goodwill.
• Foreign currency
•
… see next page
PoTL 2017 paragraph [11.170]
Cryptocurrency
• From ATO web-site
One example of cryptocurrency is Bitcoin. Our view is that
Bitcoin is neither money nor Australian or foreign currency.
Rather, it is property and is an asset for CGT purposes.
Other cryptocurrencies that have the same characteristics
as Bitcoin will also be assets for CGT purposes and will be
treated similarly for tax purposes
Is the asset a CGT asset ?
Important to classify CGT assets into their relevant
categories (special rules apply to each):
Categories of
CGT assets
CGT assets
(if not a collectable
or personal use
asset)
Collectables Personal use assets
PoTL 2017 paragraph [11.170]
Collectable
Collectables
Defined in s 108-10(2) as:
• Artwork, jewellery, an antique or 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.
PoTL 2017 paragraph [11.180]
Collectable
Collectables
Special rules apply to collectables, as follows:
1
• Capital gains and capital losses are disregarded when the
first element of a collectable’s cost base is less than $500
2
• Cost base of a collectable: disregard 3rd element (non-
capital costs of ownership)
3
• Quarantining rule: capital losses from collectables can only
be used to reduce capital gains from collectables
4
• Set of collectables are treated as a single collectable
PoTL 2017 paragraph [11.180]
Personal use assets
Defined as an asset (other than a collectable) that is used or kept
mainly for personal use or enjoyment, excluding land or buildings
(s 108-20(2)).
Examples include:
• television at home
• mobile telephone for private use
• a bicycle
• a yacht owned for personal use and enjoyment.
Personal use asset do not include land and buildings,
personal motor vehicles or motor bikes.
If the asset is considered a collectable it will not be treated as
a personal use asset.
PoTL 2017 paragraph [11.190]
Personal Use Assets
Personal use assets
Special rules apply to personal use assets, as follows:
1
• Capital gains and capital losses are disregarded when the first
element of a personal use asset’s cost base is less than $10k
2
• Cost base of a personal use asset: disregard 3rd element
(non-capital costs of ownership)
3
•
from personal use assets are disregarded
4
• Set of personal use asset are treated as a single personal use
asset
PoTL 2017 paragraph [11.190]
Are the following CGT assets, collectables, or
personal use assets?
(a) an engagement ring which cost $5,000?
(b) a second-hand car purchased for $2,000?
(c)shares in BHP?
(d) your home?
(e) a painting hung in the foyer of your
accountant’s office?
(f) a holiday home at Byron Bay?
Learning Objective 4
Identify exceptions and
exemptions
from the CGT rules
Step 3:
An exception or exemption allows a taxpayer to reduce a
capital gain or disregard the gain altogether.
Categories
of
exemptions
Exempt
gains and
losses on
certain
assets
Exempt or
loss
denying
transactions
Anti-overlap
provisions
Small
business
relief
PoTL 2017 paragraph [11.220]
Is the CGT event / asset exempt ?
Disregarded capital gains and losses on certain assets
1 • Cars, motorcycles and valour decorations (s118-5)
2
• Collectables < $500; personal use assets < $10,000 (s118-
10)
3 • Assets used to produce exempt income (s118-12(1))
4 • Shares in a pooled development fund (s118-13)
5 • Depreciating assets (s118-24(1))
6 • Trading stock (s 118-25)
PoTL 2017 paragraphs [11.230] – [11.275]
Basic exemption allows a capital gain or loss arising from a
CGT event where the CGT asset is a dwelling and the:
Basic case can be extended, limited, or a partial exemption
may apply.
1 • Taxpayer is an individual; and
2
• The dwelling was the taxpayer’s main residence
throughout the whole of ownership period: s 118-110 (1).
PoTL 2017 paragraphs [11.380] – [11.390]
Step 4: Do the special CGT rules apply?
• ITAA 1997 Part 3-3 contains special CGT rules for certain
CGT events, including rollover relief, which permits a capital
gain to be deferred to a future income period.
• The rollover applies to a range of capital gains tax (CGT)
events involving the transfer of ownership of assets, where
those events occur as a result of a court order, formal
agreement or award.
• The rollover applies to CGT events where the transferor
disposes of an asset to the transferee spouse (CGT event A1)
https://legalvision.com.au/when-does-cgt-rollover-relief-apply/
https://legalvision.com.au/when-does-cgt-rollover-relief-apply/
Step 5: Does a capital gain or capital loss
arise from the CGT event?
To calculate whether there has been a capital gain or loss
must determine:
1. Determine the capital proceeds from the CGT event
2. Determine the cost base of the CGT event
3. Subtract the cost base from the capital proceeds.
For most CGT events, a capital gain occurs when the “capital
proceeds” exceeds the “cost base” of the CGT asset.
Taxpayer makes a capital gain if:
>
Taxpayer makes a capital loss if:
Reduced Cost Base >
Capital Proceeds
Taxpayer makes neither a capital gain nor capital loss if
the capital proceeds are less than the cost base but more
than the reduced cost base.
PoTL 2017 paragraphs [11.440] – [11.460]
Learning Objective 5
Determine the capital proceeds and the
relevant cost base for a CGT asset
Capital Proceeds
Capital proceeds are the amount the taxpayer receives or
is entitled to receive in relation to the CGT event: s 116-20.
GST on the supply is disregarded: s 116-20(5).
Six modifications to capital proceeds:
1 • Market value substitution rule
2 • Apportionment rule
3 • Non-receipt rule
4 • Repaid rule
5 • Assumption of liability rule
6 • Misappropriation rule
PoTL 2017 paragraph [11.470]
Capital Proceeds
Modification 1: Market value substitution rule (s 116-30)
Applies when the taxpayer:
• receives no capital proceeds;
• some or all capital proceeds cannot be valued; or
• did not deal at arm’s length with the another entity.
Capital proceeds are deemed to be the market value.
Wife Husband
Wife transfers a CGT
asset to her husband
Husband pays less
than the market value
MV sub. rule applies
PoTL 2017 paragraph [11.470]
Capital proceeds
Modification 2: Apportionment rule (s 116-405)
– If a payment covers several CGT events then the payment needs to be split amongst the
relevant assets. Also, if payment includes consideration for an asset (or assets) subject to a
CGT event (or events) as well as other things, apportionment needs to happen so that the
asset(s) subject to the CGT events are apportioned with reasonable amounts.
Modification 3: Non-receipt rule (s 116-45)
• Capital proceeds are reduced if the taxpayer does not receive, or is not likely to receive, some
or all of the capital proceeds.
Modification 4: Repaid rule (s 116-50)
• Capital proceeds are reduced to the extent the taxpayer has to repay capital proceeds
already received.
Modification 5: Assumption of liability rule (s 116-55)
• Capital proceeds are increased if another entity assumes liability in connection with the CGT
event. For example the party disposing of the asset may receive part of the compensation in
case and the balance will constitute an interest-bearing loan. The initial value of the loan will
need to be included in capital proceeds.
Modification 6: Misappropriation rule (s 116-55)
• Capital proceeds are reduced by the amount misappropriated by an employee of agent in
connection with the CGT event.
PoTL 2017 paragraph [11.470]
• On 2 June 2018, David transfers a rental property to his
wife Tanya for no consideration.
• David acquired the property in May 2013 for $250,000
including stamp duty, legal fees and all other incidental
costs connected with the procurement of the land.
• The market value on the day of disposal was $500,000.
Is there a capital gain and how much?
Cost Base
Cost base is the total of the costs associated with the CGT
asset. There are 5 elements:
Element Cost base item (s 110-25(1)-(6))
1 Cost of acquisition
2 Incidental costs in relation to the acquisition or event, eg
stamp duty, lawyer fees, transfer fees, commission
3 Non-capital costs of ownership for assets acquired after
20 August 1991, e.g. interest, rates, repairs, land tax
4 Capital enhancement costs to increase the value of the
CGT asset, e.g. cost of a new kitchen in a rental property
5 Capital expenditure incurred to establish, preserve or
defend the taxpayer’s title to the asset
PoTL 2017 paragraph [11.480]
The indexed cost base corrects for inflation and
is available if the asset is acquired on or after
20th September 1985 and before 20th
September 1999.
Essentially the cost base is multiplied by a
factor:
Indexed cost base =
Cost base x CPI (Disposal)/CPI (Acquisition)
PoTL 2017 paragraph [11.500]
‘Reduced cost base’ for capital losses (s 110-55)
Reduced cost base is used for the purpose of working out a
capital loss.
Largely the same as cost base, except for 2 differences:
• Reduced cost base cannot be indexed.
• 3rd element is any amount that is included in the taxpayer’s
assessable income because of balancing adjustments. All
other elements are the same.
PoTL 2017 paragraph [11.500]
Which of the following can form part of the cost base of a rental
property used for income producing purposes?
• Repairs to broken window
• Rates and land tax
• Interest expense on loan
• Legal fees on purchase
• Legal fees on mortgage(loan)
• Stamp duty of purchase (a State Govt Tax). Sometimes called a
Land Transfer Fee
• Purchase price of rental property
• Extensions to build extra room
• Concrete driveway replacing existing gravel driveway
• Removal of old chimney
• Clearing old vegetation away
Consider the following 2 transactions:
• You acquire a large block of land with a single
title. You subdivide the land into 6 smaller
blocks and sell 5 of them.
• On the remaining block you construct a house
with an associated granny flat. As you do not
have a granny, you sell the granny flat.
Are there any CGT implications associated with
these transactions?
A CGT discount can be applied to reduce the amount of
a capital gain if :
• the gain is made by a tax resident individual, trust or
complying super fund (including self-managed super
funds);
• it results from a CGT event happening after 21
September 1999;
• no indexation applies to the cost base; and
• the asset must be owned for at least 12 months
The discount percentage for individuals and trusts is
50%. It is one-third for a complying super fund.
Companies are not entitled to the 50% discount.
Five-step process to calculate the net capital gain (gains and
losses for all events in the income year)
1
• Current year capital gains less current year capital losses (in the
order the taxpayer chooses)
2
• Remaining capital gains are reduced by any unapplied net capital
losses from previous years (in the order the taxpayer chooses,
however applied in the order they were made)
3
• Reducing any remaining discount capital gains by the discount
percentage
4
• Apply small business concessions (if available)
5
• Add up: any remaining capital gains that are not discount capital gains
+ any remaining discount capital gains
PoTL 2017 paragraphs [11.510] – [11.570]
Capital losses
• A net capital loss is worked out by
subtracting capital gains for the income year
from capital losses for the income year. If the resulting
amount is more than nil, it is the taxpayer’s
net capital loss for the income year (s 102-10).
• A net capital loss is not deductible from assessable
income – it must be offset against capital gains made by
the taxpayer in the current or later income years.
• The capital loss must be applied before any discount
Learning Objective 6
Calculate the net capital gain/loss on
disposal of CGT assets.
On an individual asset, the taxpayer:
makes a capital gain under the indexation method if
Capital Proceeds > Indexed Cost Base
makes a capital loss under the indexation method if
Capital Proceeds < Indexed Cost Base
makes a capital gain under the discount method if
Capital Proceeds > Cost Base
makes a capital loss under the discount method if
Capital Proceeds < Cost Base
PoTL 2017 paragraphs [11.440] – [11.460]
Taxpayer makes a net capital gain under the indexation
method if Indexed Capital Gains > Capital Losses (whether
indexed or not)
– The Net Capital Gain will be Indexed Capital Gains – Capital
Losses (whether indexed or not)
Taxpayer makes a net capital gain under the discount
method if Capital Gains > Capital Losses
– The Net Capital Gain will be Capital Gains – Capital Losses
if the taxpayer is ineligible for a discount.
– Eligible taxpayers will have their Net Capital Gain
reduced by half or one-third depending on the nature of
the entity (see slide 44).
PoTL 2017 paragraphs [11.440] – [11.460]
Jan is an Australian resident adult individual non-business
taxpayer entity. She has carried forward capital losses of
$2,000 from the 2017 income year. During the 2018 income
year, the following occurred:
• In January 2018, Jan sold ANZ shares which she purchased
in March 2014. This resulted in a capital gain of $50,000.
• In May 2018, Jan sold 500 Rio Tinto shares she purchased
in May 2012. This resulted in a capital loss of $10,000.
Calculate Jan’s net capital gain to be included in her
assessable income for the year ended 30 June 2018.
Aramis is an Australian resident adult individual non-business taxpayer entity who sold
the following items during the income year ended 30 June 2018:
(1) Vacant land sold in June 2018 for $300,000 that had been bought by him on
21/3/2006 for $25,000. This is being paid in 12 monthly instalments of $25 000, however
the purchaser has declared bankruptcy and the last two instalments due next financial
year will not be paid. Aramis also has interest deductions of $60 000 which he has not
claimed as a tax deduction.
(2) A collectible car sold in March 2018 for $150,000. Aramis bought the car in October
2000 for $50,000 as he loves collectible cars,
(3) A high-performance racing bicycle sold in January 2018 for $12,000. Aramis bought
the bicycle in January 2009 for $9,000 for recreational purposes.
(4) 10,000 shares in XYZ Ltd sold in February 2018 for a total sale price of $180,000.
Aramis bought all the shares for long term investment purposes during November and
December 1997 at a total cost of $95,000.
(5) An antique sold on 1 May 2018 for $11,000. Aramis bought the antique on 31
December 1988 at a cost of $6000 for personal reasons. The CPI rate of quarter ending
30 September 1999 is 68.7 (there was no evolution in the rate after that point) whilst the
CPI rate of quarter ending 31 Dec 1988 was 51.2
(6) Jewelry sold in July 2017 for $12,000. The jewelry was purchased for 29/09/09 for
$20,000.
Calculate Aramis’s net capital gain/loss for the year
CGT is a distinct statutory regime within ITAA1997.
It affects an individual’s income tax liability
because of the inclusion of net capital gains in
assessable income.
- ACC 304�Taxation Law
- COMMONWEALTH OF AUSTRALIA�Copyright Regulations 1969��WARNING
- Learning Objective 1�
- Learning Objective 2�
- Learning Objective 3 �
- Step 2: Is the asset a CGT asset ?
- Learning Objective 4�
- Step 3: Is the CGT event / asset exempt ?
- Step 4: Do the special CGT rules apply?�
- Step 5: Does a capital gain or capital loss arise from the CGT event?�
- �Learning Objective 5�
- �Capital proceeds
- �Learning Objective 6�
Capital Gains Tax
Overview
Overview
CGT – 5 Step Process
Step 1: Has a CGT event happened?
Has a CGT event happened?
Other CGT events
Class activity 1
Cryptocurrency
Is the asset a CGT asset ?
Collectable
Collectable
Personal Use Assets
Personal Use Assets
Pre-workshop question 1
Is the CGT event / asset exempt ?
Main residence Exemption
Capital gain or Capital Loss
Capital Proceeds
Capital Proceeds
Class activity 2
Cost Base
Indexed cost base
Reduced cost base
Pre-workshop question 2
Pre-workshop question 3
CGT Discount
Applying Capital Losses
Capital losses
Capital gain calculation
Net Capital Gain calculation
Pre-workshop question 4
Class activity 3
Closing summary