DIPLOMA IN LAW
LEGAL PROFESSION
ADMISSION BOARD
LAW EXTENSION COMMITTEE
LAW EXTENSION COMMITTEE SUBJECT GUIDE
12 TAXATION AND REVENUE LAW
SUMMER SESSION 2015-16
This Guide includes the Law Extension Committee’s course information and teaching program and the
Legal Profession Admission Board’s syllabus. The syllabus is contained under the heading “Prescribed
Topics and Course Outline” and has been prepared in accordance with Rule 27H(a) of the NSW
Admission Board Rules 2015.
Course Description and Objectives
Lecturer
Assessment
March 2016 Examination
Lecture Program
Weekend Schools 1 and 2
Texts and Materials
Compulsory Assignment
Assignment Question
List of references to Australian Taxation Law – 25th ed.
Prescribed Topics and Course Outline
Weekend School Questions
Course Materials
1
1
1-2
2
2-3
4-5
5
6
6
7
8-12
13-20
21-22
1
LAW EXTENSION COMMITTEE
SUMMER 2015-16
12 TAXATION AND REVENUE LAW
COURSE DESCRIPTION AND OBJECTIVES
The Taxation and Revenue Law course is an overview of the Income Tax Assessment Act and related
legislation. General principles concerning the assessability and deductibility of different types of
receipts and items of expenditure are considered, along with more recent developments in relation to
the tax treatment of fringe benefits and capital gains. The differing tax consequences in respect of
various legal entities, such as partnerships, trusts and companies, are also considered. The last part
of the course deals with the collection and recovery of tax, and the procedures to be followed by a
taxpayer in disputing a tax assessment with the Commissioner of Taxation.
The objective of the course is to provide an overview of the structure of the tax legislation which will
enable students to determine, at least in broad terms, the tax consequences that flow from particular
factual situations. This is achieved through a study of the legislation and decided cases, and the
consideration of hypothetical factual situations that would commonly be encountered in practice.
LECTURER
Mr A J O'Brien, BEc, LLB, LLM (Syd), CA
Tony O'Brien is a member of the New South Wales Bar practising in Sydney and a chartered
accountant. He holds the degrees of Bachelor of Laws, Bachelor of Economics and Master of Laws
from the University of Sydney. Mr O'Brien was previously a solicitor of the Supreme Court, and has
worked in the tax divisions of large law and accounting firms. He is a long-standing member of the
Law Extension Committee as a nominee of the NSW Bar Association.
ASSESSMENT
To be eligible to sit for the Board’s examinations, all students must complete the LEC teaching and
learning program, the first step of which is to ensure that you have registered online with the LEC in
each subject for which you have enrolled with the Board. This gives you access to the full range of
learning resources offered by the LEC.
To register with the LEC, go to www.sydney.edu.au/lec and click on the WEBCAMPUS link and follow
the instructions. Detailed guides to the Webcampus are contained in the material distributed by the
LEC, in the Course Information Handbook, and on the Webcampus.
Eligibility to Sit for Examinations
In accordance with the Legal Profession Admission Rules, the LEC must be satisfied with a student’s
performance in a subject in order for the student to be eligible to sit for the examination, conducted by
the Legal Profession Admission Board (LPAB). Assignments are used to assess eligibility.
Students are expected to achieve at least a pass mark of 50% in assignments to be eligible to sit for
examinations. However, a category of “deemed eligible” has been introduced to offer students whose
assignment mark is between 40-49% an opportunity to sit for the examination. In these circumstances
students are often advised not to sit. A mark below 40% means a student is not eligible to sit for the
examination.
2
Assignments as part of the Board’s Examinations
Assignment results contribute 20% to the final mark in each subject.
The Law Extension Committee (LEC) administers the setting and marking of assignments. The LEC
engages the LPAB’s Examiners to assess or supervise the assessment of assignments.
Submission
Assignments must be received by 11:59pm on the due date unless an extension has been granted.
Extensions must be requested by email prior to the due date. Specific supporting evidence must be
provided. Assignments that are submitted more than ten days late will not be accepted. Late
assignments attract a penalty of one mark out of 20, or 5% of the total marks available, per day.
Assessment
Assignments are assessed according to the “Assignment Grading and Assessment Criteria” outlined
in the Guide to the Presentation and Submission of Assignments. Prior to the examination,
assignments will be returned to students and results posted on students’ individual results pages of
the LEC Webcampus. Students are responsible for checking their results screen and ascertaining their
eligibility to sit for the examination.
Review
Where a student’s overall mark after the examination is between 40-49%, the student’s assignment in
that subject will be included in the Revising Examiner’s review. The final examination mark is
determined in accordance with this review. Assignment marks will not otherwise be reviewed.
MARCH 2016 EXAMINATION
Candidates will be expected to have a detailed knowledge of the prescribed topics:
General principles; Income from personal services; Income from property; Income from a business;
Capital gains tax; Allowable deductions; Taxation of companies and shareholders; Taxation of
partnerships; Taxation of trusts; Returns, assessments, objections and appeals; Collection and
recovery and General anti-avoidance provisions.
Candidates will be expected to have studied the prescribed materials in relation to these topics, and to
have analysed the cases contained in the Law Extension Committee's course outline.
All enquiries in relation to examinations should be directed to the Legal Profession Admission Board.
Examination Prize
The "CCH Prize" ($100 publication voucher) has been donated by CCH Australia Ltd for the best
examination mark in Taxation.
LECTURE PROGRAM
Lectures in Taxation and Revenue Law will be given by Mr O'Brien and will be held on Tuesdays
commencing at 6.00pm. All lectures, apart from the lecture scheduled for 15 December, will be held in
New Law School Lecture Theatre 026 (New LSLT 026). The lecture scheduled for 15 December will
be held in New Law School Lecture Theatre 104 (New LSLT 104). A map of the University’s main
campus, showing the location of these venues, can be found on page 53 of the Course Information
Handbook.
Please note that this program is a general guide and may be varied according to need. Readings are
suggested to introduce you to the material to be covered in the lecture, to enhance your understanding
3
of the topic, and to encourage further reading. You should not rely on them alone. Aside from the
references below to cases, the other references are to chapters and paragraphs from the textbook
Australian Tax Law.
WEEK
VENUE
DATE
TOPIC
KEY READING
1
New LSLT
026
10 Nov
General principles
Chapter 3
2
New LSLT
026
17 Nov
General principles
Chapter 3
FCT v Cooke and Sherden
3
New LSLT
026
24 Nov
Income from personal
Services
FCT v Dixon
Smith v FCT
4
New LSLT
026
1 Dec
Income from property
IRC v Ramsay
Stanton v FCT
5
New LSLT
026
8 Dec
Income from business
FCT v Whitfords Beach
Westfield v FCT
6
New LSLT
104
15 Dec
Income from business
FCT v Whitfords Beach
Westfield v FCT
Study Break: Friday 18 December 2015 – Sunday 10 January 2016
7
New LSLT
026
12 Jan
Capital gains tax
Chapter 7
8
New LSLT
026
19 Jan
Capital gains tax
Chapter 7
26 Jan
No Lecture Scheduled – Australia Day Public Holiday
9
10
New LSLT
026
2 Feb
Allowable deductions
Herald and Weekly Times v FCT
Sun Newspapers and Associated
Newspapers v FCT
11
New LSLT
026
9 Feb
Taxation of companies and
shareholders
18-000 – 18-010
18-100 – 18-130
18-200 – 18-207
18-330 – 18-387
18-500 – 18-520
12
New LSLT
026
16 Feb
Taxation of partnerships
Taxation of trusts
17-000 – 17-050
17-060 – 17-260
16-000 – 16-090
16-200 – 16-305
13
New LSLT
026
23 Feb
Returns
Collection and recovery
Anti-avoidance provisions
DFCT v Richard Walter
FCT v Citibank
30-000 – 30-467
30-600 – 30-640
31-300 – 31-700
32-400 – 32-500
25-300 – 25-345
25-600 – 25-700
4
WEEKEND SCHOOLS 1 AND 2
There are two weekend schools principally for external students. Lecture students may attend on the
understanding that weekend school classes aim to cover the same material provided in weekly
lectures and are primarily for the assistance of external students.
It may not be possible to cover the entire course at the weekend schools. These programs are a
general guide and may be varied according to need. Readings are suggested to introduce you to the
material to be covered in the lecture, to enhance your understanding of the topic and to encourage
further reading. You should not rely on them alone.
Weekend School 1
TIME
MAJOR TOPICS
KEY READING
Friday 27 November 2015: 5.00pm – 9.00pm in Carslaw Lecture Theatre 273 (CLT
273)
5.10pm-6.20pm
General principles
Chapter 3
6.30pm-7.35pm
General principles
Chapter 3
FCT v Cooke and Sherden
7.45pm-9.00pm
Income from personal
services
FCT v Dixon
Smith v FCT
Saturday 28 November 2015: 4.00pm – 8.00pm in New Law School Lecture Theatre
024 (New LSLT 024)
4.10pm-5.20pm
Income from property
IRC v Ramsay
Stanton v FCT
5.30pm-6.35pm
Income from a business
FCT v Whitfords Beach
Westfield v FCT
6.45pm-8.00pm
Capital gains tax
Chapter 7
Weekend School 2
TIME
MAJOR TOPICS
KEY READING
Friday 29 January 2016: 5.00pm – 9.00pm in New Law School Lecture Theatre 024
(New LSLT 024)
5.10pm-6.20pm
Capital gains tax
ATL: refer to Chapter 7
6.30pm-7.35pm
Allowable deductions
Herald and Weekly Times v FCT
Sun Newspapers and Associated Newspapers v
FCT
7.45pm-9.00pm
Allowable deductions
Herald and Weekly Times v FCT
Sun Newspapers and Associated Newspapers v
FCT
5
Saturday 30 January 2016: 4.00pm – 8.00pm in New Law School Lecture Theatre 024
(New LSLT 024)
4.10pm-5.20pm
Taxation of companies and
shareholders
18-000 – 18-010
18-100 – 18-130
18-200 – 18-207
18-330 – 18-387
18-500 – 18-520
5.30pm-6.35pm
Taxation of partnerships
Taxation of trusts
17-000 – 17-050
17-060 – 17-260
16-000 – 16-090
16-200 – 16-305
6.45pm-8.00pm
Returns
Collective and recovery
Anti-avoidance provisions
DFCT v Richard Walter
FCT v Citibank
30-000 – 30-467
30-600 – 30-640
31-300 – 31-700
32-400 – 32-500
25-300 – 25-345
25-600 – 25-700
TEXTS AND MATERIALS
Course Materials

Guide to the Presentation and Submission of Assignments (available on the LEC Webcampus)
Prescribed Materials



Barkoczy, Core Tax Legislation & Study Guide – most recent edition available
Woellner, Barkoczy, Murphy & Evans, Australian Taxation Law – most recent edition available
Cooper, Krever and Vann, Income Taxation – Commentary Materials, most recent edition
Reference Materials




Australian Tax Practice, Thomson Reuters ATP
Australian Tax Handbook, Thomson Reuters ATP
Australian Federal Tax Reporter, CCH
Australian Master Tax Guide, CCH
LEC Webcampus
Once you have registered online with the LEC, you will have full access to the facilities on the LEC
Webcampus, including links to relevant cases and legislation in the Course Materials section.
6
COMPULSORY ASSIGNMENT
In Taxation and Revenue Law, there is only ONE ASSIGNMENT. This assignment is
compulsory and must be submitted by all students. Students must submit the assignment by
the due date. A pass mark is 50%. Refer to the Guide to the Presentation and Submission of
Assignments for the assignment grading and assessment criteria. Students who fail to satisfy
the compulsory requirements will be notified through the Results screen on the Webcampus
before the examination period of their ineligibility to sit the examination in this subject. The
maximum word limit for the assignment is 1200 words (inclusive of all footnotes but not
bibliography).
The rules regarding the presentation of assignments and instructions on how to submit an assignment
are set out in the LEC Guide to the Presentation and Submission of Assignments which can be
accessed on the LEC Webcampus. Please read this guide carefully before completing and submitting
an assignment.
The completed assignment should be lodged through the LEC Webcampus, arriving by 11:59pm on
the following date:
Compulsory Assignment
Monday 11 January 2016
(Week 7)
ASSIGNMENT QUESTION
To obtain the Taxation and Revenue Law assignment question for the Summer Session 201516, please follow the instructions below:
1.
Register online with the LEC (see page 27 of the Course Information Handbook for detailed
instructions). Once you have registered, you will have full access to all the facilities on the
LEC Webcampus.
2.
Then go into the Webcampus, select the Course Materials section and click on the link to
the assignment question for this subject.
7
LIST OF REFERENCES TO AUSTRALIAN TAXATION LAW – 25TH EDITION
TOPICS
REFERENCES
General Principles:
- Legislation framework
- Concept of income
- Residence
- Source
- Derivation
Chapter 3
13-000 – 13-460
24-040 – 24-066
24-100 – 24-170
Income from Personal Services
4-000 – 4-170
4-700 – 4-740
4-800 – 4-820
26-000 – 26-200
26-330
Income from Property
5-000 – 5-215
5-300 – 5-380
5-400 – 5-420
5-500 – 5-525
Income from Business
6-000 – 6-560
6-800 – 6-910
14-000 – 14-160
Capital Gains Tax
7-030 – 7-995
8-500 – 8-540
8-850 – 8-855
Deductions
10-000 – 10-330
10-420 – 10-480
11-000 – 11-450
11-500 – 11-520
12-100 – 12-190
12-500 – 12-540
Taxation of Companies and Shareholders
18-000 – 18-010
18-100 – 18-130
18-200 – 18-207
18-330 – 18-387
18-500 – 18-520
Partnerships
16-000 – 16-090
16-200 – 16-305
Trusts and the Taxation of Children
17-000 - 17-050
17-060 – 17-260
21-010 – 21-050
Returns, Assessments, Objections and Appeals
30-000 – 30-467
30-600 – 30-640
31-300 – 31-700
Collection and Recovery
32-000 – 32-125
32-400 – 32-510
General Anti-Avoidance Provisions
25-300 – 25-345
25-600 – 25-700
8
PRESCRIBED TOPICS AND COURSE OUTLINE
1.
GENERAL PRINCIPLES
(a)
Sale of goods
(1)
Legislative framework
(b)
Provision of services
Income Tax Assessment Act 1997, Chapter 1
(a)
Constitutional aspects of taxation
(b)
Structure of the Income
Assessment
Act
1997
relationship to the Income
Assessment Act 1936
(c)
(2)
Tax
and
Tax
Concept of income
(a)
Common law concept of income
(b)
Receipt of money or money's worth
Tennant v Smith [1892] AC 150
FCT v Cooke and Sherden (1980) 80 ATC
4140
(c)
Interest
(d)
Dividends
Esquire Nominees v FCT (1973) 73 ATC 4114
Direct versus indirect taxation
Income Tax Assessment Act 1997, Division 6
Income Tax Assessment Act 1936, ss 6, 21,
21A, 26(e)
(3)
FCT v French (1957) 98 CLR 398
FCT v Mitchum (1965) 113 CLR 401
(e)
Royalties
FCT v United Aircraft Corporation (1943) 68
CLR 525
(5)
Derivation
Income Tax Assessment Act 1997, ss 6-5, 610
(a)
Appropriate method of recognition of
income: cash/accruals
C of T (SA) v Executor Trustee (Carden's
Case) (1938) 63 CLR 108
Residence
Income Tax Assessment Act 1997, s 995-1
Income Tax Assessment Act 1936, s 6(1)
(b)
Salary and wages
(c)
Trading income
J Rowe and Sons v FCT (1971) 124 CLR 421
(a)
Individuals
(d)
Income from professional practice
(aa) Ordinary meaning of "resident"
IRC v Lysaght [1936] AC 234
Gregory v DFCT (1937) 57 CLR 774
Henderson v FCT (1970) 119 CLR 412
FCT v Firstenberg (1976) 76 ATC 4141
(e)
Prepaid income
(ab) Extended definition of "resident"
FCT v Applegate (1979) 79 ATC 4307
FCT v Jenkins (1982) 82 ATC 4098
Arthur Murray (NSW) v FCT (1965) 114 CLR
314
(6)
(b)
Koitaki Para Rubber Estates v FCT (1940) 64
CLR 15
Unit Construction Co v Bullock [1960] AC 351
Malayan Shipping Co v FCT (1946) 71 CLR
156
(4)
Exempt income
Companies
Income Tax Assessment Act 1997, Divisions
11, 50, 51
2.
INCOME FROM PERSONAL SERVICES
(1)
Income according to ordinary concepts
Source
Income Tax Assessment Act 1997, s 6-5
Income Tax Assessment Act 1997, s 995-1
Income Tax Assessment Act 1936, s 6C
FCT v Dixon (1952) 86 CLR 540
9
Hayes v FCT (1956) 96 CLR 47
Scott v FCT (1966) 117 CLR 514
Brown v FCT [2002] FCA 318
(b)
Extended definition of "royalty"
Murray v Imperial Chemical Industries [1967] 2
All ER 980
(2)
Relevant statutory provisions
(c)
Income Tax Assessment Act 1997, ss 10-5,
15-2, Division 82-83
(3)
(a)
Deemed source of certain royalty
payments
Interest
Elements of s 15-2
Income Tax Assessment Act 1997, s 6-5
Smith v FCT (1988) 164 CLR 513
(b)
Reseck v FCT (1975) 75 ATC 4213
McIntosh v FCT (1979) 79 ATC 4325
(3)
(a)
Heads of liability
(b)
Definition of "fringe benefit"
JNG Knowles & Associates Pty Ltd v FCT
2000 ATC 1451
Disguised interest payments
INCOME FROM PROPERTY
(1)
Annuities
Income Tax Assessment Act 1997, s 10-5
Income Tax Assessment Act 1936, s 27H
(a)
What constitutes an annuity?
(b)
Significance of "a fixed gross sum"
Royalties
Income Tax Assessment Act 1997, ss 10-5,
15-20
Income Tax Assessment Act, ss 6, 6C
Common law meaning of "royalty"
McCauley v FCT (1944) 69 CLR 235
Stanton v FCT (1955) 92 CLR 235
FCT v Sherritt Gordon Mines (1977) 137 CLR
612
source
of
interest
Lease and rental income
(a)
Nature of lease/rental payments
(b)
Premiums
4.
INCOME FROM A BUSINESS
(1)
Concept of a business
Thomas v FCT (1972) 72 ATC 4094
Ferguson v FCT (1979) 79 ATC 4261
FCT v Walker (1985) 85 ATC 4179
Evans v FCT (1989) 89 ATC 4540
(2)
Egerton Warburton v DFCT (1934) 51 CLR
578
Just v FCT (1949) 8 ATD 419
IRC v Ramsay [1935] 1 All ER 847
Deemed
payments
Income Tax Assessment Act 1997, ss 6-5, 105
Inter-relationship between Fringe
Benefits Tax Assessment Act and
Income Tax Assessment Act
3.
(a)
(b)
(c)
(4)
(2)
Nature of interest payments
Lomax v Peter Dixon and Son [1943] 1 KB 671
Fringe Benefits Tax Assessment Act
(c)
(a)
Employment termination payments
Taxation of business income
Income Tax Assessment Act 1997, ss 6-5, 105, 15-15
Income Tax Assessment Act 1936, s 21A
(a) Normal proceeds of business
Kosciusko Thredbo v FCT (1984) 84 ATC
4043
Memorex v FCT (1987) 87 ATC 5034
FCT v Cyclone Scaffolding (1987) 87 ATC
5083
GP International Pipecoaters v FCT (1990)
170 CLR 124
(b)
Isolated transaction or undertaking
Scottish Australian Mining Co v FCT (1950) 81
CLR 188
10
FCT v Whitfords Beach (1982) 82 ATC 4031
(c) "Extraordinary" transactions
FCT v Myer Emporium (1987) 87 ATC 4363
FCT v Spedley Securities (1988) 88 ATC 4126
Westfield v FCT (1991) 91 ATC 4234
(d)
(f)
of
compensation
McLaurin v FCT (1961) 104 CLR 381
Allsop v FCT (1965) 113 CLR 341
FCT v Spedley Securities (1988) 88 ATC 4126
Realisation of investments by
investment/ insurance companies
5.
London Australia Investment Co v FCT (1977)
138 CLR 106
(e)
Apportionment
payments
CAPITAL GAINS TAX
(1) Structure of Income Tax Assessment Act
1997
Non-cash business benefits
Income Tax Assessment Act 1997, Part 3-1
FCT v Cooke and Sherden (1980) 80 ATC
4140
(3)
(2)
CGT events
Income Tax Assessment Act 1997, Divisions
103 and 104
Trading stock
Income Tax Assessment Act 1997, Division 70
(3)
Definition of "trading stock"
(b)
Tax accounting for trading stock
Income Tax Assessment Act 1997, Division
108
(c)
Value of trading stock
(4)
Australasian Jam Co v FCT (1953) 88 CLR 23
(4)
Meaning of "CGT assets"
(a)
Cost base
Income Tax Assessment Act 1997, Divisions
110, 112 and 114
Compensation
(5)
Income Tax Assessment Act 1997, ss 15-30,
20-20(2), 70-115
(a)
Cancellation
agreement
of
a
Income Tax Assessment Act 1997, Division
116
"structural"
(6)
Van den Berghs v Clark [1935] AC 431
Californian Oil Products Ltd v FCT (1934) 52
CLR 28
Restriction on ability to carry on a
business
Calculation of capital gain/loss
Income Tax Assessment Act 1997, Division
102
(7)
(b)
Capital proceeds
Exemptions
Income Tax Assessment Act 1997, Division
118
Dickenson v FCT (1958) 98 CLR 460
(8)
(c)
Heavy Minerals v FCT (1966) 115 CLR 512
(d)
Termination
of
agency
management contracts
and
Allied Mills Industries v FCT (1989) 89 ATC
4365
(e)
Anti-avoidance provisions
Cancellation of business contracts
Reimbursement
of
deducted expense
previously
H R Sinclair v FCT (1966) 14 ATD 194
Income Tax Assessment Act 1997, Division
149
(9)
Other provisions
Income Tax Assessment Act 1997, Division
109 and 128
6.
ALLOWABLE DEDUCTIONS
(1)
General deductions
11
Income Tax Assessment Act 1997, s 8-1
(a) Determinative tests of deductibility
Ronpibon Tin v FCT (1949) 78 CLR 47
Herald and Weekly Times v FCT (1932) 48
CLR 113
Nevill v FCT (1937) 56 CLR 290
(b)
Relevance of purpose
Magna Alloys and Research v FCT (1980) 80
ATC 4542
FCT v Total Holdings (Aust) (1979) 79 ATC
4279
Ure v FCT (1981) 81 ATC 4100
(c)
(4)
Income Tax Assessment Act 1997, ss 20-20,
20-30, 20-35, 25-35
(5)
Losses
Income Tax Assessment Act 1997, Divisions
36, 165, 166
Avondale Motors (Parts) v FCT (1971) 71 ATC
4101
7.
TAXATION OF COMPANIES AND
SHAREHOLDERS
(1)
Definition of "dividend"
Apportionment
Ronpibon Tin v FCT (1949) 78 CLR 47
Ure v FCT (1981) 81 ATC 4100
Bad debts
Income Tax Assessment Act 1936, s 6(1)
(d)
Meaning of "incurred"
(2)
FCT v James Flood (1953) 88 CLR 492
FCT v A G C (Advances) (1984) 84 ATC 4776
(e)
Negative limbs: capital outgoings
Sun Newspapers and Associated Newspapers
v FCT (1938) 61CLR 645
B P Australia v FCT (1965) 112 CLR 386
Income Tax Assessment Act 1936, s 44(1)
(3)
Operation of imputation
Negative limbs: private outgoings
Lunney and Hayley v FCT (1958) 100 CLR
478
FCT v Payne [2001] HCA 3
FCT v Finn (1961) 106 CLR 60
Handley v FCT (1981) 81 ATC 4165
Forsyth v FCT (1981) 81 ATC 4157
Lodge v FCT (1972) 72 ATC 4174
(2)
Deemed dividends
Income Tax Assessment Act 1936, ss 108,
109, Division 7A
(4)
(f)
Taxation of shareholders
Repairs
Income Tax Assessment Act 1997, Division
200 to 205
(a)
Franking a dividend
(b)
Maintaining a franking
debit/credit entries
account:
[See also Income Tax Assessment Act 1997, s
10-5]
Income Tax Assessment Act 1997, s 25-10
FCT v Western Suburbs Cinemas (1952) 86
CLR 102
W Thomas and Co v FCT (1965) 115 CLR 58
Lindsay v FCT (1960-1961) 106 CLR 377
Law Shipping Co v IRC (1924) 12 TC 621
Odeon Associated Theatres v Jones [1972] 1
All ER 681
8.
PARTNERSHIPS
(1)
Definition of "partnership"
Income Tax Assessment Act 1936, s 6(1)
(2)
Taxation of partnership income
Income Tax Assessment Act 1936, ss 90-93
(3)
Capital allowances
(3)
Income Tax Assessment Act 1997, Divisions
40 and 43
Wangaratta Woollen Mills v FCT (1969) 119
CLR 1
Overview of the application of capital
gains tax to partnerships
[See also Income Tax Assessment Act 1997, s
10-5]
12
9.
TRUSTS AND THE TAXATION OF
CHILDREN
(1)
Concept of a trust
Taxation Administration Act, ss 14ZZM, 14ZZR
Taxation Administration Act 1953, Schedule 1,
s 255-5
Southgate Investment Funds Limited v DCT
[2013] FCAFC 10
(2)
Taxation of trust income
(3)
Income Tax Assessment Act 1936, ss 95-101
Pay-as-you-go (PAYG)
Taxation Administration Act, Schedule 1 pt 2-5
and 2-10
FCT v Whiting (1943) 68 CLR 199
Taylor v FCT (1969) 119 CLR 444
(3)
Revocable trusts and trusts for minors
12. GENERAL ANTI-AVOIDANCE
PROVISIONS
Income Tax Assessment Act 1936, s 102
(1)
Form versus substance in interpreting
legislation
Truesdale v FCT (1970) 120 CLR 353
Hobbs v FCT (1957) 98 CLR 151
(2)
Income Tax Assessment Act 1936, pt IVA
(4)
Taxation of income of children
Income Tax Assessment Act 1936, pt III, div
6AA
[See also Income Tax Assessment Act 1997, s
10-5]
10. RETURNS, ASSESSMENTS,
OBJECTIONS AND APPEALS
(1)
Obligation to lodge tax return
Income Tax Assessment Act 1936, ss 161-164
(2)
Assessment/amended assessment
Income Tax Assessment Act 1936, ss 166-177
(3)
Objections
Taxation Administration Act, pt IVC
DFCT v Richard Walter (1995) 183 CLR 168
(4)
Appeals to the Administrative Appeals
Tribunal or Federal Court
Taxation Administration Act, pt IVC
11. COLLECTION AND RECOVERY
(1)
Powers of the Commissioner
Income Tax Assessment Act 1936, ss 263-264
FCT v Citibank (1989) 89 ATC 4268
(2)
Recovery of unpaid tax
(a)
Scheme
(b)
Tax benefit
(c)
Dominant purpose of obtaining a tax
benefit
Peabody v FCT (1994) 94 ATC 4663
FCT v Spotless Services Ltd (1996) 186 CLR
404
Commissioner
of
Taxation
v
Futuris
Corporation Ltd (2008) 237 CLR 146
13
WEEKEND SCHOOL QUESTIONS
FIRST WEEKEND SCHOOL
1.
Micron Pty Ltd is a manufacturer and supplier of computer software. In July 1987 Micron Pty Ltd
enters into a contract with Logic Ltd under which for a flat fee of $10,000 per year, Micron Pty Ltd
will supply Logic Ltd with certain technical information relating to computer software. The
contract was for 10 years. A second contract is entered into under which Logic Ltd agreed to sell
to Micron Pty Ltd some of its own computer software for a total price of $100,000 (the "purchase
price") payable by five annual instalments, each one being equivalent to five percent of the
annual sales revenue derived by Micron Pty Ltd. If, after the fifth instalment, the total amount
paid is less than or exceeds the purchase price, then the purchase price is to be adjusted
accordingly.
Advise both Micron Pty Ltd and Logic Ltd of the taxation consequences of these arrangements.
2.
Reginald works for Supa-Nova Ltd ("SN") as an employee electrician. He also works on
weekends in his own business for a number of different companies, including Cosmo Pty Ltd,
which is manufacturer of small electric products. He is married to Beatrice, and they have a 19
year old daughter, Penelope.
Advise generally as to the taxation implications of the following arrangements:
3.
(a)
In November 2009 SN makes an ex gratia payment of $1,000 to Penelope to help her
defray her costs of studying at university. SN makes similar payments to the children of a
number of other people who work for them.
(b)
Cosmo is so pleased that Reginald is able to do emergency electrical repairs for them one
weekend that, in addition to his cash remuneration, they allow him to choose two electric
products which they will give to him for free – Reginald chooses an electric razor for himself
and an electric kettle for Beatrice.
(c)
Reginald leaves SN in January 2010 to work permanently for Cosmo. In appreciation of his
services in the past, SN gives Reginald, in June 2010, an interest free loan of $500.
The Astaire Dance Company offers a special deal if a student signs up for a series of 100
dancing lessons. These lessons may be taken over a period of six years. The special deal is
only available if a student pays for the 100 lessons before taking the second lesson.
Anne pays for 100 lessons in advance in a lump sum. In the first year (1 July to June 30) she
takes 20 lessons, in the second year 45 lessons and, in the third and fourth (the present) year,
she has taken no lessons. Thus she still has available 35 lessons. When will the Astaire Dance
Company have to bring the lump sum payment to account for tax purposes?
4.
Nicole is an electrician employed by International Electronics Ltd ("IE"). In September 2010 IE, in
recognition of Nicole's marvellous abilities as an electrician, grant her a loan for 13 months at an
interest rate of one percent per annum.
In November 2010, Nicole retires from her employment with IE. In December 2010, IE gives her
a further loan of $5,000 for a period of two years, interest free, to provide her with some
assistance in her retirement.
In January 2011, Nicole, to help pass her time during her retirement, gives her next door
neighbour, Fred, some assistance in installing new electrical wiring in his fruit and vegetable
shop. In return for this assistance, Fred gives Nicole a box of fruit and vegetables which he has
grown on his land. Unfortunately, in February 2011, there is a short circuit in the wiring, and
Fred's shop is damaged by fire. Nicole gives Fred, by way of recompense, a lump sum payment
to cover the damage caused to the shop, together with profits which are lost to Fred by reason of
the shop being closed for repairs.
Explain the taxation implications of the loan and gift made to Nicole and the payment made to
Fred.
14
5.
6.
Until 30 April 2010, Robin carried on the business of selling lawn mowers in shop premises at
Liverpool, and employed four persons. On that day she sold her business to Sharon. Robin now
carries on business on her own account as a lawn mower repairer. She has no business
premises, but travels from her home to the premises of customers with faulty lawn mowers, and
carries out the repairs there.
(a)
Advise Robin as to the proper basis of accounting for the preparation of her income tax
returns for the year ending 30 June 2010.
(b)
What are the consequences for Robin of a change in her basis of accounting? What would
be the tax implications of Robin offering her clients one year lawn mower servicing contracts
which are paid for by the clients in advance.
Veronica, in December 2010, left her job as cosmetic consultant with a department store, and
became a distributor of women's cosmetics manufactured by Nova Pty Ltd ("Nova"). Nova
entered into an agreement with Veronica under which she was granted the right to distribute
cosmetics from Nova at wholesale prices and sold those cosmetics on a door-to-door basis at
prices recommended by Nova. Veronica did exceptionally well in selling cosmetics and, in June
2011, Nova gave her a ticket for an all expenses paid holiday in Tasmania. Veronica,
unfortunately, hates Tasmania and asked Nova whether she could have cash in lieu of the ticket,
but Nova would not agree. Veronica thought that she should take the holiday anyway as a sign
of good faith. As she expected, she did not enjoy the holiday at all.
Advise Veronica as to the tax consequences, if any, of having taken the holiday.
7.
Jim has a one man business cleaning office building windows as an independent contractor. He
has a five year contract to spend one day a week (either by himself or his agent) cleaning the
windows of Office Ltd's four storey building for a fee of $20,000 per year. Jim has similar
contracts with four other building owners. When the contract with Office Ltd has four years to
run, Jim falls from the building and suffers injuries which prevent his ever working again as a
window cleaner. Office Ltd immediately terminates Jim's contract and engages another window
cleaner.
Jim threatens legal proceedings against Office Ltd for termination of his contract and for the
injuries he has suffered which are due, he alleges, to Office Ltd's negligence. Office Ltd offers
Jim $100,000 for his injuries, and four annual payments of $18,000 each in respect of his
contract.
Jim is disposed to accept Office Ltd's offer, and seeks your advice as to the taxation
consequences of doing so.
8.
Advise as to the capital gains tax consequences in respect of the following (referring to the
provisions in the ITAA 97):
(a)
Ben acquired shares in Acme Pty Ltd in 1980. At that time the company's assets consisted
of a $100 deposit in a bank account. In 2010, Acme acquired a block of land for $100,000,
which is now the major asset by the company. Ben has decided to sell his shares in Acme
to Ken for a substantial profit.
(b)
Anne is the managing director of Frazzle Ltd, a company which manufactures cutlery.
Frazzle is successfully taken over in September 2010, and an agreement is reached with
Anne under which she is paid $100,000 in return for her resigning from the office of
managing director and entering into a restrictive covenant in which she agrees not to be
engaged in any capacity in the business of manufacturing cutlery in Sydney for a period of
five years.
(c)
Penny, an avid stamp collector, acquired, in October 1986, a rare stamp for $50. She sold
the stamp in February 2010 for $1,000. In the same month she sold a block of land for
$50,000. She had acquired this land in January 2009 for $55,000.
(d)
Brian acquired a cottage in 1980 for $20,000, which he rents to other persons. In 2010,
Brian expended $100,000 in building an additional storey on to the cottage. He has now
received an offer of $200,000 to sell the cottage.
15
9.
Brainstorm Ltd is a company incorporated in Singapore. A group of Australian resident
companies control 49 percent of the voting power of Brainstorm. Brainstorm's business activities
consist of constructing, for profit, high rise buildings in Singapore and other Asian cities.
Brainstorm is taxed on its profits in the various Asian countries in which it carries on its
construction business. Its activities are managed by three directors, Brown, Smith and Jones,
none of whom is a resident of Australia. Brown is a resident of Singapore, Smith lives in Hong
Kong, and Jones lives in Papua New Guinea. The directors make decisions and resolutions
concerning the company by sending telexes to one another from the locations in which they live.
Brown, Smith and Jones, although very expert in matters concerning the construction of
buildings, do not have great expertise in the financial and other commercial affairs of the
company. They rely on the expertise of Blanco White, who is retired, lives in Sydney, and was
formerly the managing director of a large Australian company. White receives all the information
concerning the business activities of the company, and advises each of Brown, Smith and Jones
via telex concerning the business affairs of Brainstorm. Brown, Smith and Jones invariably rely
on the expertise of White, and make directors' resolutions according to his recommendations.
White owns one percent of the shares of Brainstorm, and is paid a yearly fee of $200,000 for his
services.
(a)
Advise whether Brainstorm is a resident of Australia for the purposes of the Income Tax
Assessment Act.
(b)
Irrespective of your answer to (a), assume that Brainstorm is treated as a resident for
Australian tax purposes. Explain the Australian taxation treatment of Brainstorm's profits
from construction projects.
10. Advise as to the capital gains tax consequences in respect of the following (referring to the
provisions in the ITAA 97):
(a)
In September 2010, Raymond borrowed funds from Big Bank Ltd to buy an undeveloped
block of land as an investment. The cost of the land was $30,000. He pays interest to Big
Bank in respect of the borrowings, as well as council rates in respect of the land. He has
spent $200 in fixing the fences on the perimeter of the land, which were falling down. He
has also been spending $100 per year to keep the land clear of refuse and long grass,
which could otherwise be a fire hazard. He now plans to sell the land for $60,000.
(b)
Beth is in partnership with Jan. The interests of each in the assets of the partnership are
equal, and Beth and Jan agree to share profits and losses equally. In 2008, the partnership
assets comprise 3,000 shares in A Ltd, which were acquired for $6,000. In 2010, the
partners admit Sue to the partnership in consideration of her paying to each of them an
amount of $6,000. It is agreed that each partner will have equal entitlements to assets,
profits and losses of the partnership. The partnership now plans to sell the shares in A Ltd
for $18,000. Jan is in need of money, and plans to sell a painting she bought for herself in
1989 for $10,000. She expects however that she will only receive $8,000 from the sale.
(c)
Bob was interested in sailing and, in July 2010, acquired a yacht for $8,000 which he sails
on weekends.
(ca)
(cb)
(cc)
Bob sold the yacht in 2010 for $6,000; alternatively
Bob sold the yacht in 2010 for $9,000; alternatively
Bob used the yacht extensively during the week to entertain and hold business
negotiations with persons with whom he did business, before selling it in 2010 for
$9,000.
11. Advise as to the capital gains tax consequences in respect of the following (referring to the ITAA
97):
(a)
In 1986, Sally acquired an eighteenth century wooden cabinet for $5,000. She died in 2010,
and in her will left the cabinet to Tom. At the date of her death, the market value of the
cabinet was $8,000. Tom sells the cabinet in 2010 for $10,000.
(b)
April was told by her employer, Apex Ltd, that her employment would be terminated. She
commenced an action against Apex claiming inter alia wrongful dismissal. The action was
16
settled by Apex paying April $50,000 in settlement of all actions which April may have had
against Apex.
(c)
Ben bought a block of land as an investment in 2008 for $50,000. In 2009, Ben's son, Bill,
was married. In 2010, Ben, in an effort to assist Bill in starting a home, sold the land to Bill
for $50,000, notwithstanding the rise in land values since Ben originally bought the block
which valued the land at $70,000. Bill built a house on the land at a cost of $100,000 and
lived in the house with his wife. In 2011, Bill sold the house for $250,000.
12. In March 1984, Felicity acquired an old motel on the beach at Byron Bay. Soon after
commencing operations at the motel, she noticed that the beach front occasionally suffered from
pollution. Upon making further investigation, she discovered that the cause of the pollution was
an adjacent dwelling owned by William, which had been converted into a guesthouse without
Council approval. The septic tank system of this dwelling was not able to cope with the additional
effluent resulting from the use of the dwelling as a guesthouse, and as a result, sewage was
seeping onto the beach near Felicity's motel. William was advised that he could cure the illegality
by applying to the Council for a rezoning of the land, and accordingly did so. Felicity learnt of his
application, and opposed the rezoning on the basis of the sewerage system on William's
premises. Felicity was not only concerned about the health risk caused by the pollution, but also
the adverse affect it might have on her business. She incurred legal expenses $3,000 in
contesting the rezoning application, and was successful.
In January 1989, Felicity learnt that a block of land adjoining her motel, on which was located an
old grass tennis court, was to be auctioned. She thought the tennis court might improve the
business of her motel, and successfully bid for the land. In March 1989, she replaced the grass
court with a cement tennis court at a cost of $40,000, and in February 1990 replaced the
dilapidated wooden fence surrounding the tennis court with one constructed of steel mesh. The
steel mesh fence cost $5,000 and was, in fact, cheaper that a replacement wooden fence. She
did not know if the steel mesh would last any longer than a wooden fence.
Felicity, in March 1991, had health problems and so sold, at a substantial profit, the motel and
adjoining block of land containing the tennis court to Raelene Ramanda.
Advise Felicity of the implications under the Income Tax Assessment Act of her dealings
involving the motel, the adjoining land and the $3,000 tennis court.
13. Mr Fu is currently a resident of Hong Kong, but decides to apply for Australian nationality under
the Business Migration Program established by the Australian Government. Under the Program,
an applicant and his immediate family are granted Australian nationality on condition that a
certain sum of money is invested by the applicant in an Australian business. Mr Fu, in
compliance with the Program, invests the requisite money in an Australian business. He and his
family are thereafter granted Australian nationality. Mr Fu proposes to buy a house in Sydney,
and to send his wife and children to live in Sydney. However Mr Fu owns a substantial business
in Hong Kong and, because of adverse Australian tax consequences, does not want to become a
resident of Australia.
What are the adverse Australian tax consequences if Mr Fu becomes a resident of Australia? By
reference to the statutory definition of resident and case law, advise Mr Fu whether he will be a
resident of Australia and, in particular, what steps he may take to reduce the risk of becoming a
resident.
17
SECOND WEEKEND SCHOOL
1.
Sam Spade is employed by Dinkertons, a private detective agency engaged in private
investigations and protective security work. Sam becomes concerned about his personal safety
and future career, so Dinkertons pay for him to undertake a self-defence course conducted by
the Bruce Lee Martial Arts Centre. Dinkertons buys a pistol for Sam, which he can use in his
work, and Sam himself pays to take an automatic weapons course run by a pistol club, to
improve his experience and accuracy with automatic pistols. Dinkertons encourage employees
to take such courses, and associate course experience with their more successful employees.
One consequence is that more specialist and more highly paid work can be assigned to the
employee. Sam acquires, at his own expense, a bulletproof vest for use on dangerous
assignments.
Dinkertons acquire a house at Burwood for use as office premises. Shortly after the purchase it
is decided that the colour the house is painted is not suitable. The whole house is repainted in a
more appropriate colour at a cost of $5,000.
Discuss the deductibility of the expenditures incurred by Dinkertons and Sam.
2.
Narelle receives the following statement from Nova Pty Ltd together with a dividend cheque for
$60.00:
Shareholder dividend statement
Name of company:
Date of payment:
Name of shareholder:
Number of shares:
Cents per share:
Nova Pty Ltd
9 June 2010
Narelle Pappas
1200
5.00 cents
Dividend Type
Franked/Unfranked
Franked amount:
Unfranked amount:
$
36.00
24.00
Imputed
Credit
$
23.02
The dividend is 60 per cent franked.
Note: you will need to retain the above information to assist you in preparing your tax return.
Narelle seeks your advice as to the tax treatment of the $60.00 dividend.
[Assume a company tax rate of 39 percent and individual rate of 50%.]
3.
Tom owns a large property on the south coast of New South Wales. Tom has experience in the
forestry industry, and he acquired the land in 1984 because it had several fine stands of timber.
The stands of timber are a long way from Tom's house on the property and so, in 1986, he
acquired a caravan for $3,000 which he uses as a base camp when he is involved in logging.
Tom uses the caravan to store equipment, prepare meals, shelter during bad weather and, on
occasions, sleep in overnight. Tom drives a four-wheel drive vehicle from his home to the base
camp and then drives from the base camp to the various stands of timber on his property. He
spends approximately $150 per week on petrol. Tom has also entered into an agreement with
Bob. Under the agreement Tom sold Bob 5,000 metres of timber for $20,000, payable in
advance. Bob has the right to enter Tom's property to cut and remove the timber as he requires
it.
During 1988 Tom had difficulty with persons protesting about the environmental damage caused
by his logging operations. On occasions the protesters actually entered his property and
obstructed him in the cutting of timber. As a result, Tom spent amounts on erecting fences
around his property and, from time to time, hired security guards to prevent protesters entering
his property. By 1989, Tom had cut most of the timber on the property, and was facing
increasing opposition from environmental groups. He therefore decided to sell the property. In
expectation of the sale he spent $5,000 on upgrading several of the roads on the property. In
18
1989, he sold the property at a substantial profit and also sold the caravan for $5,000.
Advise Tom generally as to the income tax ramifications of these facts.
4.
5.
On 1 July 2010, Bob Brown borrows $100,000 from Big Bank Ltd. The annual interest rate is 14
percent. Bob then lends this amount to Brown Pty Ltd at an interest rate of three percent per
annum. Brown Pty Ltd is Bob's family company, and it uses the money to buy a house which it
then rents to Bob for $20.00 per week. In his return for the year ending 30 June 2011, Bob
declares as income the interest payments he has received from Brown Pty Ltd and claims
deductions for the amount of interest he has paid to Big Bank Ltd and the amount of rent paid to
Brown Pty Ltd. On 1 October 2011, Bob receives a Notice of Assessment and an Adjustment
Sheet indicating that the deductions claimed have been disallowed.
(a)
Bob wishes to object to the assessment. Advise him of how he should do this, what
arguments he may use in support of an objection and the issues involved.
(ii)
Discuss the possible application of pt IVA of the Income Tax Assessment Act to the
transactions entered into by Bob.
Shoppers Ltd carries on the business of designing, constructing, letting and managing shopping
centres. Its method of business generally involves identifying a suitable area for shopping centre
development, acquiring land in the area, designing and constructing a shopping centre, leasing
shops to retailers, and managing the general operation of the centre. Shoppers has been in
business for 20 years, and currently manages 35 shopping centres in New South Wales and
Victoria. Shoppers has only ever sold one shopping centre, when the returns fell below profitable
levels and improvement in returns was expected due to changing demographics in the area
where the centre was located.
In 1986 Shoppers identified the outer north-west region of Sydney as a suitable area for a
shopping centre development. It acquired substantial vacant land in the area with a view to
constructing its largest shopping centre, North-West Plaza, with space to be leased to major
department stores, electrical goods retailers and grocery chains. As Shoppers had some
difficulties raising finance, construction did not start immediately. In the meantime, Shoppers
arranged for the connection to the site of electricity, gas, water and sewerage, and for the
construction of roads into and out of the site.
In 1991, due to the recession, Shoppers decided not to go ahead with the construction of NorthWest Plaza. After receiving real estate advice as to the means of obtaining the best price for the
land, Shoppers decided to sell it as a subdivision of residential blocks. As utilities had already
been connected to the land, Shoppers did no more than "peg" out the lots for sale. The lots were
sold for a substantial profit.
When Shoppers has excess funds, it lends those funds to its wholly owned subsidiary, Finance
Ltd. This company is an investment company, and uses the funds to acquire shares on the stock
exchange. The investment policy of Finance is to purchase shares which yield a certain rate on
the funds invested. However, under that policy, if the market price of the shares increases by
more that 10 percent from their original purchase price, Finance sells the shares and reinvests
the proceeds in other shares yielding the same rate of return.
Advise Shoppers of the tax consequences of selling the land, and Finance on the tax
consequences in respect of the sale of shares. In your advice do not deal with capital gains tax.
6.
Transport International Ltd ("TI") is a publicly listed company. TI pays a dividend to its
shareholders, and declares that the dividend is franked to the extent of 60 percent. Payments
are made as follows:
(a)
a dividend of $1,000 to Sue;
(b)
a dividend of $10,000 to XYZ Ltd, another public company; and
(c)
a dividend of $5,000 to Brown Pty Ltd, a private company owned by the Brown family.
19
Explain the tax consequences to each of the above shareholders, and the relevant entries in the
franking accounts of the companies.
7.
David is the residuary beneficiary under his mother's will, of which his father is the sole executor
and trustee. David's mother died on 1 January 2008, and the administration of the estate was
completed on 30 June 2008. The residuary estate comprises an investment of $1,000,000 which
yields an annual income of $120,000.
David is left the income from the residuary estate
instalments commencing on his eighteenth birthday,
have the benefit of the residuary estate absolutely.
given a discretion to make advances from time to
advancement.
which is to be paid to him by quarterly
and upon his twenty-first birthday he is to
In addition to this, his father as trustee is
time for his maintenance, education and
On 1 October 2008, David's father pays $12,000 from the income of the estate to finance a trip
by David to Paris to undertake a holiday course in French at the Sorbonne. David returns in
February 2009 to commence his final year at high school. He attains the age of 18 on 1 October
2010. In what manner and by whom should the income from the investment be returned for the
years ending on 30 June 2008, 2009, 2010 and 2011?
8.
Magna Pty Ltd ("Magna) is the trustee of the Smith family trust. The beneficiaries of the trust are
the children of Sue Smith; John who is 19 years old, a paraplegic and living in the United States;
James who is 14 years old; and Margaret who is 20 years old and married.
For many years the property of the trust has consisted of a factory which had originally been
acquired in 1965 and rented to various people. In July 1990, Magna sells the factory to Eva Pty
Ltd ("Eva"). Under the terms of the sale, Eva will pay Magna an initial amount of $200,000 and
thereafter will pay Magna $20,000 each year during the lifetime of John.
Magna has complete discretion under the terms of the deed as to the distribution of the trust
income. On 30 June 2010, Magna pays $5,000 to meet the medical costs of John; $4,000 to
James; and $1,000 to Margaret.
Advise Magna and the beneficiaries of the Smith family trust as to their liability under the Income
Tax Assessment Act in respect of the year ended 30 June 2010.
9.
Max Martin forms a partnership with his wife, Jean, and their son, Jack, aged 13, to conduct a
grocery business. Max also decides to employ his other son, Bill, aged 15, on a part-time basis in
the business. Both Jack and Bill are still at school. The profits and losses of business are to be
divided equally between Max, Jean and Jack. In addition, Jack and Jean are each paid a salary
of $150 per week. Bill is to be paid a salary of $200 per week. Max spends about 60 hours per
week working in the business. Jean spends approximately 30 hours per week. Bill and Jack
assist in the business after school, and each spends about 10 hours per week doing so. Max
wishes to encourage his sons to make provision for their future, and so requires Jack to put 75
percent of his share of the partnership profits into a savings account in Jack's name, and Bill to
put 50 percent of his salary into a savings account in Bill's name.
Max decides that the taxation position of his family can be further improved if he assigns 50
percent of his interest in the partnership to Bill.
Advise Max, Jean, Jack and Bill generally as in their taxation positions.
10. Sam owns 60 percent of the shares of Nostra Pty Ltd ("N"), the remaining 40 percent being held
by Jill. During the year, Sam sells all of his shares in N to Jill. N, a company engaged in
manufacturing gearboxes for cars, has in prior years made a number of losses which it has been
carrying forward. Jill hopes to make N's business more profitable by involving the company in
the manufacture of carburettors.
During the year of income ending 30 June 2010, N sells a property which was acquired by it prior
to September 1985. It is not expected that N will be subject to tax on the profit it derives from
that sale. For the year ending 30 June 2010, although N will derive a small amount of income, it
is anticipated by the company's directors that the prior year losses will offset such amount.
20
N desires to pay Jill a dividend out of the profit from the sale of the land.
Advise Jill and N as to the tax consequences of the above facts.
11. Steel Company Ltd carries on business as a manufacturer and supplier of concrete and concrete
products, including block and reinforced support columns. It owns and uses several old buildings
which are in need of maintenance and painting. It also operates a railway to transport material
and products to and from port facilities. The railway is functional, but 20 years old. Some
sleepers need replacement and some rails are rusted. The company's electrical equipment is in
good condition. As business is booming the company decides to expand its production and
resolves to do the following:
(a)
to repair a leaking roof in an old building, replace some old dangerous awnings and paint all
existing buildings to prevent further damage to timber;
(b)
to build a new production plant factory at the rear of the present buildings;
(c)
either to make necessary repairs to the existing railway and extend it to the new buildings,
or to scrap the old one and start again;
(d)
to buy some additional rundown locomotives and, after repairing them, to use them on its
railway to transport materials;
(e)
to mechanise fully by installing computerised manufacturing equipment.
Advise Steel Company Ltd of the deductibility of money spent in connection with items referred to
above.
21
COURSE MATERIALS
TAXATION OF TRUSTS
s98(1)
trustee assessed on beneficiary's share
Legal disability
actual
s101
s95A(2)
s95A(2) deemed

natural person

not trustee
Presently entitled
No legal disability
s98(2)
trustee assessed on beneficiary's share
s97(1)
included in beneficiary's income
resident
company

not trustee
Non -resident
s98(3)
trustee assessed
s98A
beneficiary assessed
person

not trustee
s98(3)
trustee assessed
s98A
beneficiary assessed
deceased estate
Net Income
Trust Estate
s101A
trustee assessed
not presently entitled
Commissioner's discretion
(ss 99A(2)-(3))
s99
trustee assessed on normal
rates on aggregate
s99A
trustee assessed on aggregate
and highest marginal tax
revocable trust
s102(1)(a)
trustee assessed
Trust for unmarried child under
18
s102(1)(b)
trustee assessed
resident trust estate
non-resident trust
estate
22
TAXATION
OF
TAXATION OF CHILDREN
CHILDREN
-
DIV
6
Is a person a prescribed person?
s 102AC(1)
(a)
(b)
less than 18 years on last day of year of
income and
not an excepted person
See section 102AC(2) for classes of
excepted persons
Is the income received subject to Division 6AA?
YES
NO
Div 6AA does not apply
2 categories of income
Income generally - s 102AE
Income will be subject to Div. 6AA unless within the
categories of excepted assessable income listed in
s102AE(2):
 Employment income - see s 102AE(6) & (7)
 Business income - see s 102AE(5)
 Income from certain types of investments
Trust income - s 102AG
Income will be subject to Div. 6AA unless within the
categories of excepted trust income listed in s 102AG(2)
23