WEEK 1
Chapter 1 – Taxation Theory (FTL pg1-24)
1.1 INTRODUCTION
Definition of a tax:
As per Oxford Dictionary = “Compulsory contribution to the support of government, levied on persons,
property, income, commodities, transaction, etc.”
It is also known as: duties, levies, tariffs and charges.
Taxpayers are obliged by law to pay taxes even though they do not receive any direct benefits in return. No
direct link btw taxes paid by an individual and the government services consumed by that taxpayer. Tax can
be imposed by virtually anything  referred to British ‘window tax, levied btw 1696 and 1851. The aim is to
tax the wealthy.
Income Tax:
In Aussie, income tax was introduced by the Commonwealth in 1915 to support World War 1 effort. It
remained Aussie’s major source of federal tax revenue, and is levied on taxpayers’ taxable income.
Income Tax = (Taxable Income x Tax Rate) – Tax offsets
Taxable income = Assessable income – Deductions
Consumption Taxes - VAT:
VAT = most widely modern consumption tax was 1st imposed in France (1954) and was adopted throughout
the EU. Australia imposed its own version of VAT, called “goods and services tax” (GST) on 1 July 2000.
VAT/GST – directed at taxing value that has been added to the ss of goods and services. It is borne by
end-consumers who are not registered and not entitled to credits for the VAT/GST charged on their
acquisitions. VAT/GST can be contrasted with sales tax.
Other Taxes:
• Custom duties (on imports and exports of goods)
• Excise duties (on production or manufacture of goods)
• Stamp duties (on conveyances of land and other transactions)
• Gambling taxes (on betting at casinos and races)
• Financial taxes (on banking transactions)
• Property taxes (on ownership of real and/or personal property)
• Estate duties (on value of deceased estates)
• Employment taxes (Payroll taxes – on payment of salaries and wages)
• Fringe benefits taxes (on provision of fringe benefits)
• Energy and environmental taxes (Carbon taxes)
Australian Tax Mix:
Taxes are imposed at Commonwealth, State, Territory and local govt levels.
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Commonwealth taxes/Federal Tax
GST
• Medicare Levy
Income Tax
• Medicare Surcharge
Customs Duty
• FBT (Fringe Benefit Tax)
Excise Duty
• HELP (Higher Education Loan
Program)
Superannuation
Contribution Surcharge
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State taxes
Stamp Duty
Payroll Tax
Land Tax
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1.2 FUNCTIONS OF TAXATION
(a) Revenue-raising function
Govt can also charge fees for rendering services, granting licences, imposing fines for breaches of law
and generating return from their investments. Taxes are imposed on the community at large, redirect
economic resources from citizen to govt in its spending programs, and involve diverting wealth from the
private to public sector.
(b) Social and political functions
A powerful political engineering device used to promote political objectives. Eg: govt impose excise
duties on cigarettes, to (i) raise revenue and (ii) discourage smoking - reducing nation’s health costs.
Benefit of tax concession or burden of taxation = useful tool in sculpting social behavior.
(c) Economic functions
Taxation makes cost of goods more expensive. It can be used to modify consumer behavior by
encouraging spending in 1 product rather than another (e.g.: Use tax to protect local products by taxing
importations more heavily, giving domestic co. a competitive advantage). As a macro-economic device,
taxation can help speed up or slow down the economy.
Higher taxation  less disposable Y  less spending  deflationary effect on the economy
Lower taxation  more disposable Y  more spending  inflationary effect
(d) Redistribution function
Taxation operates as a mechanism for creating economic equality, i.e. ‘tax the rich and give the poor’. It
held redistribute wealth among citizens. Govt provides a range of services that can benefit the society
as a whole, therefore increasing SOL.
Tax from government’s perspective = benefit from fortune of citizens and enterprises.
V/S
Tax from citizen’s perspective = cost of undertaking transactions, owning property, carrying on business and
earning Y.
Tax = ‘part of the price of civilisation’
1.3 TAX EXPENDITURES
Tax systems = 2 components  (1) normative tax structure (Rev collected) & (2) govt spending (tax exp.)
Tax expenditures divided into 2 categories:
(a) Tax Incentives (to induce certain activities or behaviour)
(b) Tax Concessions (to provide welfare assistance to those in need)
Tax expenditures can be provided by way of:
(a) Tax exemptions
(b) Tax deductions
(c) Tax offsets
(d) Concessional tax rates
Tax Expenditure Reporting:
Commonwealth govt’s tax expenditures are reported in its annual Tax Expenditures Statements. The aim of
the statements is to increase transparency of the tax system and allow greater scrutiny of tax expenditures.
Tax expenditure programs:
Specific tax expenditure programs include:
• Superannuation program (provide tax incentives to encourage retirement savings)
• PDF and VCLP programs (provide tax incentives for venture capital investment)
• R&D programs (provide tax incentives for R& D expenditure)
• Film production program (provide tax incentives for qualifying Aust film production expenditure)
The rationale behind these prg = to promote private investment in areas considered to be publicly desirable.
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Arguments for and against tax expenditure programs
FOR:
(i) Efficient as it overcome ‘double handling’ issues since the govt does not need to 1st collect tax and then
distribute it as a subsidy/grant. Instead, Govt simply collects less tax from those enjoying the benefit.
AGAINST:
(i) Programs are often poorly targeted and can provide benefits to unintended recipients.
(ii) Taxpayers subject to higher tax rates stand to benefit more than taxpayers on lower tax rates and this
produces an undesirable ‘upside-down’ effect.
(iii) They add considerable to the volume and complexity of the tax law - can be confused and overlooked.
(iv) The effectiveness in achieving policy objectives may not be as closely monitored and this result in:
inefficient and costly programs remaining in existence.
1.4 STRUCTURAL FEATURES OF TAXES
4 basic structural features:
Taxpayers: legal entities (eg. Individuals or companies) who are liable to pay tax and who can be
sued and penalized if it is not paid.
Tax base: each tax regime has its own tax base. In Aussie, Y tax is imposed on ‘taxable Y’ concept,
whereas GST is imposed on ‘taxable supplies’ and ‘taxable importations’
Tax periods: each tax regime has its own tax periods. In Aussie, Y tax period = Y year, i.e based on
the relevant financial year (1 July to 30 June). For GST, tax period = monthly or quarterly.
Tax rates: each tax regime has its own tax rates. Depending on nature of tax and kind of taxpayer
involved, tax rates can be set at a single (flat) rate or at differing rates (rates varying with level of tax
base). In Aussie, companies = flat rate of 30% while individuals = marginal rates (from 0% to 45%).
GST = flat rate of 10% on value (not price) of taxable supplies/importations.
Taxable Income
Tax on this Income
0-$6,000
Nil
$6,001 - $ 37,000
15% (15c for each $1 over $6000)
$37,001 - $ 80,000
30% ($4,650 + 30c for each $1 over $37,000)
$80,001 - $ 180,000
37% ($17,550 + 37c for each $1 over $80,000)
$180,001 and over
45% ($54,550 + 45c for each $1 over $180,000)
Above rates do not include Medicare levy (1.5%) and Flood levy
Direct and Indirect taxes
Direct = economic burden is borne by person who pays the tax. Eg: Income tax
Indirect = the person who pays the tax is able to pass on economic burden to 3rd parties. Eg: GST
1.5 TAX SYSTEM DESIGN
A tax system underpins a country’s economic, social and political stability. Community will accept taxation
more if it sees the justification for a tax appropriate. (Read page 15 – 18)
1.6 FEATURES OF GOOD TAX SYSTEM
Smith’s maxims
Adam Smith, the renowned Scottish economic philosopher expressed the foll. views about taxation:
 Tax amount ought to be certain and not arbitrary
 Time and manner of payment, and quantity to be paid ought to be clear and plain.
 Every tax ought to be levied at the time or in most likely convenient manner.
 Should tax as little as possible to keep out of the pockets of the people
 Subject of every state ought to contribute towards the support of the govt.
Key attributes of a ‘good tax system’:
(1) Fiscal and policy objectives
• Should collect revenue amount that govt has set out to collect otherwise it will fail its primary objective.
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Should operate in harmony with govt socio-economic policy agenda
Should be designed in way that supports the govt in achieving optimal outcomes (eg: Increase
productivity, employment growth, improved welfare and higher SOL)
Operate in ways that does not unduly interfere with or discourage advancement of country’s broader
economic imperatives.
(2) Simplicity, certainty and stability
Simplicity and certainty are desirable, else it will be difficult to comply with tax laws and apply them.
Tax laws should operate in way that they are clear, unambiguous and uncomplicated.
Both revenue authorities and taxpayers should be able to identify incidence of tax and calculate tax
liabilities with ease and certainty.
Continual reforms can contribute to uncertainty. Thus, desirable to maintain relatively stable tax laws to
allow business and investment decisions be made with confidence.
(3) Transparency and integrity
It should operate in a transparent manner and in accordance with rule of law.
Actions of revenue authorities must be closely monitored and be subject to parliamentary scrutiny.
Tax laws should be interpreted and applied in a consistent manner so that taxpayer be treated equally in
similar circumstances.
Rights of taxpayers need to be closely protected.
It needs to be robust and resilient to ensure it is not open to abuse. Thus, tax laws should be designed
in way that is difficult to avoid and evade.
Tax laws need to be drafted tightly so that there is no room for manipulation.
(4) Efficiency and flexibility
It should have low collection and compliance costs, else it would be cumbersome, time-consuming and
costly for taxpayers, and are inefficient as they divert resources from productive activities.
Govt efficiency requirement should balance taxpayer compliance obligations to ensure fairness and
effectiveness of operations
To be efficient, it needs to be flexible, i.e a good tax system should be able to cope with and respond to
changes in economic circumstances.
Having a broad tax mix ensures the burden of taxation is spread more widely among the community and
does not fall disproportionately on only certain persons. However, this can add complexity and
compliance costs.
(5) Neutrality
Should be neutral, i.e not distort commercial decisions or skew the mkt mechanism. If tax laws increase
or decrease the attractiveness of 1 arrangement ahead of another, this can alter the way taxpayers
choose to organize their affairs.
(6) Equity
Most important characteristic of a good tax system.
Horizontal equity (if people in similar circumstances are treated similarly) and vertical equity (if people
if different economic circumstances are treated differently - those better off bearing a greater share of
burden)
Depend on community perceptions. Taxes are more readily accepted if burden is spread widely among
the community rather than directed to a particular group.
GST = flat & Australian Y tax system = progressive
Chapter 3 – Australian Taxes (FTL pg47-54)
READ CONSTITUTIOAL CONSIDERATION IN LECTURE 2 (PART 1)
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WEEK 2
Chapter 13 – Ordinary Income (FTL pg229-256)
13.1
INTRODUCTION (pg229)
Assessable income for an income year = ordinary income + statutory income for that year (s6-1(1) ITAA97).
2 types of Y that are not assessable: (a) non-assessable non-exempt income-NANEI; and (b) exempt income.
Ordinary income (s6-5) is divided into income from
Statutory income (s6-10): Most important type is
personal exertion, property and business.
CGT. (FBT is not included in statutory income).
Note: if an amount ≠ ordinary Y, it may nevertheless be Y if it constitutes ‘Statutory Y’
13.2
CHARACTERISING INCOME – KEY CONCEPTS (pg230)
GP International Pipecoaters Pty Ltd v FCT  High Court stated that various factors may be relevant when
determining whether a receipt is of income or capital nature.
Scott v Commissioner of taxation  see slide 5 or pg 230.
Factor 1  Gain Concept (slide7)
Income = form of financial ‘gain’. A person’s Y for a period = change in wealth + consumption during that
period.
Gain
 (1) Income nature (assessed under ordinary Y provision)
(see slide 6 or pg 321)
 (2) Capital nature (assessed under statutory Y provision)
Under flow concept, returns generated from use/exploitation of capital assets = ordinarily Y nature. Eg: rent
from lease of land, interest received on loan, royalties derived from grant of a licence to use copyright,
dividend received from shares. These items represent ‘fruit’ from the ’tree’ (Eisner v Macomber – pg232)
 See Common Law Test (Once and for all test, Enduring benefit test and Business Entity test slide7)
Factor 2  Quality in the hands of Recipient, Reliance and Regularity (pg232)
The High Court in FC of T v McNeil 2007: Amount is Y depends upon its quality in hands of recipient, not
character of the expenditure by the other party. Also refer to Scott v FCT 1966 and GP International
Pipecoater Pty Ltd v FCT.
[Case] Keily v FC of T – Income tend to be regular (pg233)
**The High Court held that pension = Y nature because of its features of ‘recurrence, regularity and
periodicity’ and the pensioner had a continuing expectation of receiving the payments.
[Case] FC of T v Blake – Reliance and reasonable expectation (pg 233)
The Supreme Court of Queensland held that regular subsidy paid by bank to former employee on top of his
pension was of Y nature. Taxpayer received that for some years now and thus had a reasonable expectation
of receiving it.
[Case] FC of T v Harris – Not ordinary income
The taxpayer was a former bank employee and was receiving a pension from the bank’s superannuation
fund. The bank made a gratuitous payment of $450 to Smith as a supplement/goodwill gesture to offset
effects of inflation on pension. **The Full Federal Court held that the receipt was not ordinary income.
Because payment ≠ “product” of past services. It is instead characterized as a gift.
[Case] The Myer Emporium Limited v FC of T (1987) – Ordinary income even though an isolated
profit-making schemes (pg 258)
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The taxpayer, Myer Emporium, undertook a pre-arranged plan to obtain working capital from an outside
financier. The taxpayer lent $80m of company funds to Myer Finance (a member of the same corporate
group) at a commercial rate of interest (12% p.a.) for a term in excess of 7 days. Three days later, it assigned
its right to interest under the loan to the outside financier (Citicorp) for a lump sum ($45.37m), retaining the
right to receive repayment of the principal sum. **The Court held that the $45.37m received by Myer from
Citicorp was income under the ordinary income provision
Factor 3  Income must come from ‘outside sources’ - Mutuality principle (pg234)
For income to ‘come in’, it must come from outside sources. Subscription to clubs/associations ≠ordinary Y,
this can be referred to The Bohemians Club v FCT (1918) case.
[Case] Bohemians Club v Acting FC of T – not ‘income’
The taxpayer was a social club that collected membership dues from its members and applied the funds
toward activities for them. At end of the Y year, taxpayer had a surplus of funds and the Commissioner
assessed the taxpayer on the basis that this amount was taxable income. **The Court held that a person
cannot be the source of his or her own income, which income must be derived from the source outside of
the person, therefore the mere return of a person’s capital outlay is not ‘income’.
If transaction btw club and member = trading transaction  receipts = Y
If it is only a contribution to a common fund which may result in surplus  receipts ≠ Y
Factor 4  Income must generally ‘come in’ and be ‘money’ or ‘convertible into money’ (pg234)
Convertible into money
[Case] Tennant v Smith – not entitled to make profit (not income)
Employee of a bank is given the benefit of free residence in a house owned by the bank. The taxpayer
was not entitled to sublease the residence. **The Court held that the taxpayer was not taxable on the
value of a benefit of a free residence provided by the employer as the taxpayer was not entitled to
sublease the premises and could not therefore convert the benefit into income.
 The Conversion principle –Non-cash receipt
[Case] Cooke & Sherden v FC of T – not ordinary/assessable income
Taxpayers (soft drink retailers) were awarded a free holiday by a soft drink manufacturer as part of
sales incentive scheme. The holiday was not transferable and could not be converted into money.
Frequent flyer rewards
[Case] Payne v FC of T (1996) – cannot convertible into money (not assessable)
Airline tickets were not transferable and not cancellable and, cancellable if sold, ≠ Ordinary Y
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13.3
CATEGORIES OF INCOME (pg236)
For gain to be Y, it must flow from some source or be produced by some activity, and it must generally
‘come in’ and be in the form of money or something convertible into money (Tennant v Smith case).
Mere ‘gifts’ (Hayes v FCT case and Scott v FCT case) and mere realizations of capital assets (Scottish
Australian Mining Co Ltd v FCT Case) are NOT income.
4 categories of Ordinary Income (slide 14):
(i) Income from personal exertion (Dean & Anor v FCT and Brent v FCT case)
(ii) Income from business (Blockey v FCT and Californian Copper Syndicate Ltd v Harris case) Week 3
(iii) Income from profit-making scheme (FCT v The Myer Emporium Ltd case)
(iv) Income from property (Adelaide Fruit and Produce Exchange Co Ltd v DFC of T and Riches v
Westminster Bank Ltd case)
13.4
INCOME FROM PERSONAL EXERTION (pg238)
Personal Exertion Income - s6(1)ITAA36 includes Wages, Salaries, Bonuses, Gratuities, & Carry on a business.
Voluntary payments linked to the provision of services/professional activities
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So long as payments have sufficient connection with the recipient’s income-earning activities, they are
usually = Y even though payer may have not been under any legal requirement to make them.
[Case] Moorehouse v Dooland
The taxpayer was a professional cricketer entitled under the terms of his contract of employment to
collections from spectators/fans whenever he performed outstanding cricketing feats. Money collected
from spectators on these occasions was held to be income from personal exertion.
[Case] Calvert v Wainwright
Taxpayer, a taxi driver receives tips for good quality of the services rendered. ** The Court concluded that
tips were clearly remuneration for services rendered and thus = assessable Y. Also, tips to waiter = Y.
Payments that are incidental to employment
It is essential that payment be made by their employer.
[Case] Kelly v FC of T (Assessable Y)
Kelly is a professional footballer who received a $20,000 cash reward from Channel 7 for being awarded his
League’s ‘best and fairest’ player. Normally prize won ≠ ordinary income because it would be the product of
the taxpayer, services, business activities or property. **The Supreme Court of WA held that the prize was
related to the taxpayer’s pursuit of his career and his playing of the game to the best of his ability. There is
sufficient nexus for it to constitute income, thus = assessable Y.
Reward for services – Salary and wages
[Case] Brent v FC of T
The taxpayer, who was the wife of the infamous train robber Ronald Biggs, sold her life story to a newspaper.
She was paid money in consideration of making herself available for interviews with journalists. **The High
Court held that the payments were assessable as ordinary income. She had not disposed of a capital asset
nor did she assign any copyright in the manuscript. The info she possessed ≠ property right/copyright. She
was simply rewarded for her services.
Payments that are a substitute for salary
[Case] Dixon v FC of T
The taxpayer’s employer provided payments to employees who enlisted in the armed forces during the
World War II. The payments were calculated as the differences between the employees’ former salaries and
their military salaries. **The Court held that the payments were of Y nature as they were ‘substitute’ for the
wages they would have otherwise received.
Payments that are personal GIFTS (pg240)
Payments are generally not of Y nature if they can be traced to some personal relationship btw payer and
recipient. In such cases, payments = personal gifts, rather that remuneration.
[Case] Scott v FC of T
The taxpayer, a solicitor has long performed various legal services for Mrs. Freestone, a widow. The solicitor
had previously acted for her former husband and therefore developed a personal friendship with his client.
The client made an unsolicited gift of $10,000 to the taxpayer, which was expressed to be in appreciation of
his friendship rather than for any legal services performed. **The High Court held that the receipt was not
income to Scott as ordinary income under s26(e). A gift would not be ordinary income merely because it
was traceable to goodwill which was engendered/caused by services provided, and Scott had been fully
remunerated for his services. (For the gift to be income, the relation between the receipt and the taxpayer’s
activities must be such that it is in a relevant sense a product of services.)
[Case] Hayes v FC of T
The taxpayer received shares in a company from former owner for whom he had worked before and now is
close friend. **The High Court held that the taxpayer had been fully remunerated for the work done in the
past. Since, it is impossible to relate receipt of shares to any specific income-producing activity, the shares =
mere gift. Therefore, = capital receipt, ≠ Y.
Payment for relinquishing rights (slide 20)
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While amount received for rendering services = Y nature, amount received for relinquishing right = capital
nature.
[Case] Jarrold v Boustead
The taxpayer was a Rugby Union player who received a “signing-on fee” to play for a Rugby League club.
**The Court the payment received for giving up his amateur status = capital receipt.
[Case] Pritchard v Arundale
Inducement payment (in form of shares) paid to accountant to leave private practice and work for a
company. ** The Court held that consideration for shares ≠ rendering services, but his undertaking to serve
the company and thereby give up his secure livelihood. Thus, receipt = capital nature.
Payments for entering into restrictive covenants (slide 21)
Generally = capital nature
[Case] Higgs v Olivier
Film Company paid the actor Laurence Olivier a lump sum of $15,000 in return for his agreement not to act
for 18 months in any other film, in a bid to ensure the success of film ‘Henry V’. **The UK HC held that the
sum was non-assessable (Capital) as it had been paid in exchange for giving up the rights to earn income
and not for the performance of any acting or other services or employment. Thus, = capital in nature.
[Case] FC of T v Woite
The taxpayer, a professional footballer signed an agreement for $10,000 not to play for any other clubs
except North Melbourne if he ever decided to play in Victoria. ** The South Australian Supreme Court held
that the $10,000 = capital receipt paid to restrict player from playing for another club. This does not affect
his ability to play. Note that agreement did not bind him to play for North Melbourne, it only restrict other
clubs. If it had bound him to play for North Melbourne, then would be difficult not to treat amount as Y.
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Chapter 15 –Tax Accounting (FTL pg335-351)
15.1
INTRODUCTION (pg335)
Under s6-5 ITAA97, Ordinary Y = “derived”
Under s8-1 ITAA97, allowable deductions = “incurred”
(Since these words not defined in legislation, they will take on common-law meanings.)
15.2
WHEN IS INCOME DERIVED (pg336)
S6-5 ITAA97 requires taxpayers include assessable Y for the Y year the ordinary Y ‘derived’ during the Y year.
[Case] Brent v FCT
In absence of any specific statutory provision, the derivation of Y = determined by “application of ordinary
business and commercial principles.” Factors such as accounting evidence and practice will thus be relevant.
Methods of accounting for income (slide24)
(1) Cash Basis or Receipts Basis
When cash or its equivalent (eg: cheque or something convertible to cash) is constructively received
(2) Accrual Basis or Earning Basis
Y derived when it is earned, irrespective of whether or not any payment has been received. Y is
taken to have been earned when a debt comes into existence.
[Case] Ballarat Brewing Co Ltd v FCT
Method to be used = one that most accurately represent ‘truth and reality of the situation’.
[Case] CT(SA) v The Executor Trustee and Agency Co of SA Ltd (Carden’s Case)
Method to be adopted = one which ‘is calculated to give substantially correct reflex of the taxpayer’s true Y’
Employees and Sole Traders (pg337)
Generally, salary and wages = derived on cash basis. This is also appropriate for those conducting business
as sole practitioners  see Carden’s Case
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[Case] Carden’s Case
The taxpayer was a deceased sole-practitioner doctor. ** The High Court accepted that, up to the time of
death, Y has been properly accounted for on a cash basis.
[Case] Henderson’s Case
Cash basis more appropriate to a chartered accountant engaged in sole practice (FCT v Dunn case)
To determine actual appropriateness of accounting method, we must consider nature, size, structure and
particular circumstances of taxpayer’s Y and enterprise/operation. Matter depends upon nature and
incident of the Y earning enterprise.
Professional partnerships (pg338)
Accrual basis usually more appropriate here.
[Case] Henderson’s Case (pg338)
Accountancy partnership (19 partners + 295 staffs) used cash basis until 20 June 1964, but then swapped to
accrual basis. Commissioner refused this change but **High Court held that accrual basis was more
appropriate during that particular period (30 June 1965 and 30 June 1966), when considering size, structure
and method of operation of the firm. Thus, tax computation would be different. (Read more pg 338)
Sole trader forms a partnership (Change in accounting basis) (pg339)
[Case] Dormer v FCT (pg339)
Taxpayer, a sole trader, used cash basis until he formed a partnership with 2 former employees. Thus,
returned its Y on an accrual basis. **Commissioner assessed debt related to sole practice on an accrual
basis – taxpayer argued that amount should be based on Henderson’s case. **Full Federal Court however
concluded that Henderson’s case did not apply since it involved Y of the SAME business. However, it was
argued that business carried as sole practitioner ≠as partnership. It is clear that debtors of taxpayer’s former
practice remained liable for their debts and the taxpayer could have sued to recover those debts even
though he had commenced new partnership business. Therefore, any amount receivable before partnership
= cash basis & any amount after partnership = accrual basis, in the same income year.
Eg: A is a partner in a legal firm and also earns salary income from employment as lecturer at a university.
Partnership Y = accounted on accrual basis & Salary Y from employment as lecturer = cash basis.
Impediment to enforcement (pg339)
[Case] Baratt & Ors v FCT
**Full Federal Court held accrual basis should apply even though prevented under Medical Practitioners Act
1938(NSW). This is because debts came into existence when bills were given to patients. Fact that recovery
action could only be commenced in respect of bills 6 months after service = ‘impediment to enforcement’
Trading businesses (pg340)
Same as professional partnership  Accrual Basis
[Case] J Rowe & Sons Pty Ltd v FCT
** High Court stated that Y from sale of stock is derived when stock is sold and debt is created. It need not
be payable in the Y year.
Conditional contracts (pg340/slide27)
[Case] Gasparain v FCT
Sale of land under conditional contracts. ** Full Federal Court held that Y from sale was derived, not when
contract became unconditional, but at settlement when a debt accrued to the vendor. (Read more pg 340)
Unbilled services (pg340)
Prepayments (pg341/slide26)
[Case] Arthur Murray (NSW) Pty Ltd v FCT
** HC held that pre-paid tuition fees = derived in year lessons were provided, not year fees were received.
You can’t recognize money as being earned until you actually provide the service or until work is finished.
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Refund after the end of the year (pg342/slide28)
Amount of Y derived for a particular year from the taxpayer’s trading activities should take account of
refunds he is likely to provide in a subsequent year.
[Case] Ballarat Brewing Co Ltd v FCT
The Co. sold products at a ‘discount/rebate’ on the agreed gross purchase price if certain conditions are met.
Evidence indicated that it is very rare that discount/rebate were not in fact given to customers. ** The High
Court held that the taxpayer had properly taken discount and rebate into a/c in relation to the year it was
brought to a/c amounts. Method of accounting was more close to the “truth and reality” of the situation.
Income which is subject to a dispute (pg343)
15.3
WHEN IS A LOSS/OUTGOING DEDUCTIBLE? (Pg343/slide29)
It depends on whether the loss/outgoing have been “incurred” (under s8-1 ITAA97). Factors to consider
when seeing whether loss/outgoing was INCURRED:
(i) Payment is not required – courts focus on whether or not a liability exists (W Nevill & Co Ltd v
FCT)
(ii) Taxpayer must have completely subjected itself to the loss/outgoing – Possibility that a loss might
have been incurred is not enough, it needs to be certain – look at facts. (FCT v James Flood Pty Ltd)
(iii) Presently existing liability or Definitive commitment (Nilsen Development Laboratories Pty Ltd v
FCT - The HC held that it was only when employee took leave that an accrued liability to pay arose
and an outgoing was incurred. Although it is certain that a liability would rise in the future,
taxpayer was not under any obligation to make payments until employees actually took leave.
(iv) Must be more than an impending, threatened or expected liability (New Zealand Flax Investment
Ltd v FCT). A liability is not incurred where it is a mere “possibility”
(v) Matching Principle (pg346-348/slide30) (Coles Myer Finance Ltd v FCT) “2 step approach” in
determining when an outgoing is deductible:
(a) Determine whether loss/outgoing was incurred (apply jurisprudential principles)
(b) Determine to which period loss/outgoing is properly referable.
 See slide 31 (Undischarged and Estimated Liabilities)
(Read more pg 346-351)
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Chapter 12 – Residence and source (FTL pg213-225)
12.2 RESIDENCE
According to general jurisdictional rules (pg 213):
• Resident – assessed on (1) ordinary income [s6-5(2) ITAA97] and (2) statutory income [s6-10(4)
ITAA97] from ALL sources, whether in or out of Australia, during the financial year.
•
Non-Resident/Foreign resident – assessed on (1) ordinary income [s6-5(3)(a) ITAA97] and (2)
statutory income [s6-10(5)(a) ITAA97] from AUSTRALIAN sources only. Not taxed on foreign income
which has no connection with Australia. However, we need to be aware of numerous exceptions.
Residency status important because of:
- Different tax rates payable by resident and non-resident
- Different withholding tax regime, diff. accrual taxation regime, diff. transfer pricing regime
- For CGT (Capital Gain Tax) purposes
Australian resident is defined in s995-1 ITAA97 as a person that is resident for the purposes of ITAA36 as per
s6(1) ITAA36, where for Individuals (para(a)) and Companies (para(b))
Page 10 / 61
Residence of individuals
S6(1)(a) ITAA36 definition of “residence” identifies four tests:
(1) Reside test
(2) Domicile and permanent place of abode test
(3) 183-day test, or
(4) Commonwealth superannuation test
An individual who does not satisfy at least one of these tests is a non-resident
1. Reside Test (pg 214-215)
Individual = resident of Aussie = if he/she ‘resides’ in Aussie.
Term ‘reside’ not defined in legislation, and thus takes its ordinary meaning, i.e dictionary. For ex: ‘to dwell
permanently or for considerable time, to have one’s settled or usual abode, to live in/at a particular place’
Main factors in determining ‘residence’ as per the Commissioner in Taxation Ruling TR 98/17:

Intention or purpose of presence (eg: for employment or education)

Family and business/employment ties (Has family living with him or has his business/employment in
Aussie)

Maintenance and location of taxpayer’s assets (property, bank account, etc..)

Social and living arrangements (if joins any clubs or enrolls children at a school in Aussie)

Physical presence in Australia for more than the year of income.

Frequency, regularity, habits of life, freedom of his attachment abroad and duration of visits (Levene v
IRC [1928] AC 217)
2. Domicile and permanent place of abode test
S 6(1)(a)(i) definition of “resident”, a person whose domicile is in Australia is a resident of Australia, unless
the Commissioner is satisfied that the person has a permanent place of abode outside Australia. (Person’s
domicile determined by Domicile Act 1982 and Common Law)
Note:
‘Domicile of origin’ = usually based on the domicile of his/her parents, until acquires a ‘domicile of choice’
‘Place of abode’ = place where person lives or has his home (R v Hammond – place where he lives with his
family and sleeps at night = always his place of abode)
[Case] FC of T v Applegate:
 Who domiciled in Australia being posted overseas in circumstance where the person’s domicile has not
changed. (Note: permanent ≠ everlasting)
The taxpayer, a solicitor was transferred to Vanuatu to set up a branch of his firm. While it was always
intended that he would returned to Australia, he was transferred to Vanuatu for an indefinite period, i.e. as
long as was necessary to set up the branch office. He left no assets in Aussie and surrendered the lease of
his house. However, he retained membership of an Aussie health fund and his wife returned to Aussie to
give birth to their child and claimed child endowment. In Vanuatu, he leased premises, obtained resident
status and was admitted to practice. However, he returned to Australia after two years because of ill health.
Outcome: It was held that the taxpayer’s indefinite stay in Vanuatu meant that he had a permanent place of
abode outside Australia.
[Case] FCT v Jenkins:
Fact: Jenkins was transferred to New Hebrides for a period of 3 years. He retained some Australian assets,
since he was unable to sell before leaving. He was also on an early return to Australian due to ill health.
Outcome: It was held that the fact that the taxpayer’s stay was of a fixed duration did not mean that it was
temporary. The Supreme Court of Queensland regarded the period of 3 years as significant and held that
during that period the taxpayer’s permanent place of abode was outside Australia.
Page 11 / 61
Commissioner’s views are set out in Taxation Ruling IT 2650.
Factors determining residency status of individuals that temporarily leave Aussie:
(a) Intended and actual length of stay in the foreign country. (As a ‘broad rule of thumb’, a stay of ≥ 2
years abroad = substantial period)
(b) Intention either to return to Australia at some definite point in time or to travel to another country
(c) Establishment of a home outside Australia
(d) Abandonment of any residence/place of abode he has in Australia
(e) Duration and continuity of individual’s presence in overseas country
(f) Durability of association with Australia (maintenance of bank accounts and education of children)
3. 183-days Test (pg 218)
S 6(1)(a)(ii) states that individual = resident of Australia if ‘has actually been in Aussie continuously or
intermittently during > ½ year (183 days) of Y unless Commissioner is satisfied that (i) the person’s usual
place of abode is outside Aussie and that (ii) the person does not intend to take up residence in Aussie.
The 183-days test = help determine whether a person has commenced residing in Aussie and NOT relevant
for those that are departing Aussie.
4. Commonwealth Superannuation Test (pg 218)
An individual = resident of Australia if he is:
(a) Member of a superannuation scheme as per Superannuation Act 1990
(b) Eligible employee for purpose of Superannuation Act 1976
(c) Spouse or child under 16 covered by (a) and (b)
Companies (pg 218/slide 37)
S6(1)(b) provides 3 tests for determining the residence of a company. A co. is a resident of Australia if it:
(1) is incorporated in Australia
(2) carries on business in Australia and has its central management and control in Australia,
(3) carries on business in Australia and has its voting power (major s/h) controlled by Australian residents
A company which does not satisfy any of these tests is a non-resident.
1. Incorporation test (pg 218)
A company is a resident of Australia if it is incorporated in Australia regardless of where the co’s central
management and control is located, i.e regardless of the co being controlled by foreign shareholders, etc.
2. Central management and control test (pg 219)
2 requirements: 1st: the company must be carrying on business in Australia; 2nd: then its central
management and control be located in Australia.
However, [Case] Malayan Shipping Co Ltd v FCT (FTL pg 219): The company was incorporated in Singapore
by Mr Sleigh (Major s/h & MD) who lived in Melb. MR Sleigh has right to remove other directors and all
major decisions would not be effective without his agreement. The HC held that the company’s central
management and control is in Aussie since MR Sleigh exercised complete control over its business operation
from home (Aussie). While this test is more qualitative than the place of incorporation test, its application
has tended to focus on formal act, such as the place of conduct of directors’ meetings, substance-over-form
[Case] Esquire Nomines Ltd v FCT
The taxpayer was incorporated in Norfolk Island. Its directors were all Norfolk Island residents and director’s
meetings were held in Norfolk Island. HOWEVER, the agendas for the meetings were prepared by the firm
of Australian accountants acting on behalf of Australian residents who were the beneficial owners of the
taxpayer. **The Court held that although the directors invariably did what they were told, this did not mean
that the accountants managed and controlled the company. Therefore, the directors in Norfolk still
managed and controlled the company.
Page 12 / 61
[Case] Unit Construction Co Ltd v Bullock
A wholly-owned subsidiary of a co. incorporated, managed and controlled in the UK - incorporated in Kenya
and - registered office in Nairobi. According to Articles of Association, the management and control of the
co. rested with its directors and it was expressly stated that directors’ meetings were not to take place in the
UK. However, when the taxpayer did not trade successfully and the management of the company was taken
over by the directors of the parent company via directors’ meetings held in the UK. **It was held that, in
substance, the taxpayer was managed and controlled in the UK. Therefore the company is managed and
controlled by its shareholders rather than its directors.
3. Control of Voting Power Test
These test two requirements:
1. The taxpayer carries on business in Australia
2. Its voting power must be controlled by shareholders who are residents of Australia.
Dual Residence (pg 220)
Under common law, it is technically possible for taxpayers to be resident in more than 1 jurisdiction.
However, this rule is affected by Australia’s DTAs, which contains ‘tie-breaker rules’, specifying the country in
which a ‘dual resident taxpayer’ will be deemed to be resident.
12.3 SOURCE (pg220/slide 38)
When income is derived from more than 1 source, it may be appropriate to apportion the income between
the different sources (C of T(NSM) v Cam & Sons Ltd)
1. Service income (pg221)
The source of service income = place where the services are performed
[Case] Efstathakis v FCT
A Greek public servant, employed by the Greek Govt who worked for the Greek Press in Australia was held
to have derived his income in Australia as she performed the relevant work here. **The Court held that the
source of service income is in Australia.
[Case] French v FCT
An Australian engineer who was employed by an Australian co. derived Y arising from work he performed
while in NZ from NZ. **The Court held that the source of service Y is from New Zealand rather than Aussie.
[Case] Mitchum v FCT – dealing with place of contracting and place of payment.
An American actor contracted by a Swiss company to act in a film for 11weeks in Australia, was paid in the
US. **The High Court held that there is no rule of law that the source of salary/wages is where the work is
performed. Therefore, it concluded that the taxpayer’s income did not have an Australian source.
[Case] Evans v FCT – place of payment
An academic who was granted a period of study leave to work in Switzerland continued to have his salary
paid into his Australian bank account. Although the taxpayer performed his research overseas, it was held
that his study leave grant and his salary had an Australian source mainly on the basis of place of payment.
2. Business income (pg222)
Source of business income depends on the nature of the business and the mode in which it is carried on.
In general, source of business income = where goods are sold (CT (WA) v D & W Murray) or where business
is transacted (FCT v United Aircraft Corporation). However, where Y is derived from series of operations
occurring in different places, its source = usually apportioned btw different locations (List of cases - pg 222)
3. Interest income
The source of interest arising from LOAN = place where loan agreement is entered into and money is lent
out. If the economic activities give rise to interest occurred in Aussie, then the interest = Australian source.
Page 13 / 61
(1st point): Where contract entered into.
[Case] FCT v Spotless Service Ltd
(2nd point): Where money is made available
s25(2) ITAA36: Interest on money secured by a mortgage of any property in Aussie = have an Aussie source.
Business Contract/loans = where contract was made/transacted
[Case] CT(NSW) v Studebaker Corporation of Australasia Ltd
An American car manufacturer sold cars to a NSW Co., where manufacturer can charge interest on money
owing on cars delivered but not yet paid. **HC held that interest received by manufacturer flowed from the
agreement made in US. Since it arose from business transacted in US, thus = US source rather that NSW
4. Dividend Income
Under s44(1) ITAA36, the source of dividend = where profits out of which the dividend was paid, are made.
[Case] Esquire Nominees Ltd v FCT
The Court held that the activity giving rise to the profits derived by ‘MCL’ was the holding of the shares in
‘PIL’. This activity took place in Norfolk Island, and therefore profits derived by MCL ≠ Australian source.
Consequently, the dividend paid to the taxpayer was not paid out of profits derived by MCL from sources in
Australia, but rather from activity/profits made in Norfolk Island.
[Case] Parke Davis & Co v FCT – pg 222
5. Rental income
Source of rent from the lease of fixed property (eg: land) = where property is located. For moveable
property (eg: chattels), source of rent = where the lease agreement is entered into and the goods are taken.
[Case] James Fenwick & Co Ltd v FCT (see page 222)
6. Royalty income
Deemed source in Australia if paid by Australian residents
[Case] United Aircraft Corporation v FCT (pg 223)
A US co. supplied know-how to an Aussie co. under agreement made in US. **It was held that Y ≠ Australian
source because the royalties were not derived from property located in Australia, nor was they earned from
any service/act performed in Australia. Instead, royalties were produced under an agreement made and
performed in US. The fact that the know-how was used in Australia did not give the Y an Aussie source.
S6C ITAA36 - specific statutory source rule  royalties paid to a non-resident have Australian source if:
- Outgoing incurred by a resident that are not incurred in carrying on a business at or through a PE in Aus.
- Outgoing incurred by a non-resident that are incurred in carrying in business or through PE in Aus.
12.4
TEMPORARY RESIDENTS (pg224)
 See pg 224
12.5
PERMANENT RESIDENTS/Establishment (PE) (pg224)
 See pg 224
(Read Double Tax Agreement on pg 875 -884)
Page 14 / 61
WEEK 3
Chapter 13 – Ordinary Income
 Business v Hobby (FTL pg242-256)
13.5
INCOME FROM BUSINESS
Ordinary proceeds from a business = ordinary income.
Ordinary proceeds from a hobby ≠ ordinary income
Gains from trading transaction/incident of a business = ordinary proceeds/Income nature
 Leading case of California Copper Syndicate Ltd v Harris (1940)
[Case] California Copper Syndicate Ltd v Harris (1940) – pg 242
The taxpayer sold copper-bearing land to another company in exchange of shares in that company. Taxpayer
argued that it should be assessed on profit made on the basis that it had substituted 1 capital asset (land)
for another capital asset (shares).
** The Court of Exchequer found that the taxpayer wanted to benefit from profit made on sale of land since
it never had enough funds to mine the land. The profit from sale is therefore not a mere substitution but
rather an assessable trading transaction.
** The Lord Justice Clerk made an important statement of principle: 2 important distinctions were drawn:
(1) Gains arising from realization of ordinary investment (Capital in nature) and
(2) Gains arising from ‘trading transaction’ and ‘profit making schemes’ (Income in nature)
Trading transactions (pg243)
[Case] Blockey v FCT
Taxpayer purchase wheat scrip with intention to sell them at a profit. ** HC: sale constituted the proceeds
of a business. Same for Edwards v Bairstow & Anor AND Rhodesia Metals Ltd v Taxes Commissioner case.
Mere realization of a capital asset (pg243)
This refers to gain arising outside the ordinary course of business = capital nature.
[Case] Ruhamah Property Co Ltd v FCT - capital
Family Co. made profit from sale of certain properties which were gifted to co. by head of the family. Co.
held property for 9 years, during which it derived rental Y. ** The High Court held that profit from sale of
properties = capital nature because = “mere realization of a capital asset”.
[Case] Scottish Australian Mining – capital
The mining company had purchased a parcel of land in the 1860s and had mined it for coal until 1924 when
the main coal seam was exhausted. The company then decided to sell the land. To achieve a high price, the
company incurred considerable expense in subdividing the land, constructing roads and building a railway
on the land. **The High Court held that, despite the scale of activities undertaken, the profits on sale of the
land were not assessable as the company had merely taken the “necessary steps to realise the land to its
best advantage”. The land was originally acquired for a different purpose, which was coal mining. It is no
longer businesslike. (Also see Statham & Anor v FCT AND Casimaty v FCT case)
Venturing an asset into a trading activity (pg245)
[Case] FCT v Whitfords Beach Pty Ltd
3 fishermen formed a company in 1954 and acquired a land with access to fishing shacks/shed on the beach.
Years later, they sold their shares to a group of companies which intended to develop and sell land. The land
was rezoned, subdivided and sold at a profit. ** The High Court found that all these were beyond ‘mere
realization of asset’, but rather had ventured into land development business. The sale led to taxpayer being
“transformed from a co. which held land for domestic purpose of its s/h to a co. whose purpose was to
engage in commercial venture with a view to make profit”.
Identify a business (slide 7)
Page 15 / 61
S995-1 ITAA97: “business” includes any profession, trade, employment, vocation or calling, but does not
include occupation as an employee.
According to ordinary income concepts, receipts from the normal activities of a business = income.
(A) Is the taxpayer carrying on a business? (B) Did the receipt from the normal activities of the business?
If (A) and (B) are both the source of the receipt then it is ‘income’
Identifying a business, the following factors the courts will consider:
6) Characteristic of property being traded
1) Profit motive
7) Inherent characteristics of the taxpayer,
2) System and organisation
“Business” or “Corporate”?
3) Sustained activity + Repetition of
8) Time and resources committed
transactions/regularity
9) Substance over form - Weigh up all factors
4) Scale/size of activities
5) Commercial nature of transaction
(1)
Profit motive (slide9)
Profit motive is a common feature of business activities. However, look for exceptions.
[Case] Brajkovich v FCT – Not carrying on a business (GAMBLING) – (pg 250)
The taxpayer, a retired person, gambled heavily on horse races, football games, etc. **As in Martin and
Babka, the Court held that the taxpayer was not in the business of gambling (HOBBY), even though the
taxpayer strongly desired to make a substantial financial success of gambling. The Court also reflects on the
strong influence of chance and luck involved in gambling, and on assumption. The personal/private pleasure
derived from gambling as a hobby/pastime provides a ready explanation for large-scale betting activity.
In the course of delivering judgment, 6 criteria against which gambling cases are usually examined to
determine whether taxpayer is carrying on a business are as follow:
(a) Whether betting conducted in a systematic, organized and businesslike way
(b) Scale/size of wins and losses
(c) Whether betting relate to activities of business character, eg: breeding horses
(d) Whether activity engaged for profit or for pleasure
(e) Whether form of betting is to reward skill and judgment or depend purely by chance
(f) Whether gambling activity is of kind ordinarily thought as hobby or pastime/amusement/leisure.
[Case] Fergurson v FCT – Carrying on a business (no reasonable prospect of a profit)
A taxpayer may be carrying on a business although there is no reasonable prospect that they will make a
profit but they do have a profit motive.
[Case] Daff v FCT – Carrying on a business (profit motive)
The taxpayer (Daff) had been unsuccessful over some 14 years in making profit. Mr Daff, an experienced
and competent farmer, is genuine in his belief that the property will generate profits even though he has
not succeeded in doing so to date. He devoted much effort towards developing & operating the property to
that end. **The Court held that taxpayer was carrying on a business of primary production during the yrs.
(2)
System and organization (slide8)
[Case] Ferguson v FCT – Business/Income
The taxpayer, a naval officer wished to engage in primary production activities upon his retirement. In order
to begin the process of building up a herd while still in the navy, he leased 5 cows for a period of 4 years, the
cattle to be pastured and bred by a management co. **The Court held the taxpayer carried on his activities
in a systematic & well-organised way, & the taxpayer was engaged in a business of primary production.
[Case] JR Walker v FCT – Business/Income
The taxpayer who bred only 1 Angora goat was held to be in the business of goat breeding, because he was
conducting his activities in “businesslike” way (goat was kept at a stud farm in another state, cared for by
experts, and used as the basis of a breeding program involving the transplantation of live embryos). He was
found to be in business even though the venture was not particularly successful. Even though no profit was
Page 16 / 61
generated over 14 year, the presence of system and organization proved = business of primary production.
(3)
Sustained, regular and frequent transactions (slide8)
[Case] Shield v FCT - Income
A client service manager engaged in share arbitrage activities in work time by phone (as a private pastime)
from his employer’s premises. Although the taxpayer carried out only a limited number of trades (the
activities lasted only a month during which time he suffered losses of $51,756), there was systematic and
repetitive/regular system of trading. Therefore, the taxpayer was held to be carrying on a business.
(4)
Scale of activities (slide8)
[Case] Thomas v FCT - Income
The taxpayer, whose chief occupation was a barrister, acquired 3 adjoining blocks of rural land and
constructed a home on the property. The land was not purchased for the purpose of farming but the
taxpayer later discovered it was fertile. He therefore decided to cultivate the land by planting pear, nut and
pine trees. Income had not yet been generated as the trees were not fully mature but the taxpayer argued
he was carrying on a business of primary production and therefore should be entitled to various business
deductions. **The Court held that the taxpayer was carrying out a business of primary production. Even
though the activities were conducted in a small way, the trees were planted on a scale much greater than
that necessary to satisfy the taxpayer’s own domestic needs.
[Case] JR Walker v FCT – The taxpayer was held to be in the business of goat breading even though he began
with only 1 goat. The smaller the scale of activities, the most important factor is “system and organization”.
(5)
Commercial nature (slide9)
[Case] Bivona Pty Limited v FCT - Income
A company which borrowed $4m overseas immediately lent the bulk of that amount to another co. in its
corporate group, with the balance being lent to unrelated companies. **The Court held that the making of
some loans outside the corporate group showed that the taxpayer was willing to lend to eligible applicants.
The concept of “business” should not be given a narrow interpretation “so as to exclude ordinary business
transactions” between members of a corporate group which yield profits to a member of that group.
(6)
Characteristics or quantities of the property being traded (slide9)
[Case] Merv Brown Pty Ltd v FCT – Capital
Taxpayer, a clothing wholesaler sold import quotas so as to benefit from concessional custom duty rates on
certain clothing. Following changes in govt policy, taxpayer decided to concentrate on its more profitable
lines by selling certain of the quotas for less profitable lines. **The Court held the sale of these quotas was
an essential part of the taxpayer’s “Y-earning mechanism”  capital receipts and not assessable.
(7)
Inherent characteristics of the taxpayer, “Business” or “Corporate”? (slide10)
[Case] Fanmac Ltd v FCT - Income
The Court held that the activities of the trustee taxpayer were ‘the carrying on of the business of
establishing, marketing, managing and administering trusts which issued fixed rate securities …”, so that
expenditure on underwriting fees was on revenue account, and deductible.
(8)
Time and Resources committed (pg247)
Even activities undertaken for only a short time period can constitute a business.
[Case] Shields v FCT
The taxpayer was a fulltime employee of a company, and for 2 months bought share (cum dividend), receive
dividend and sell those shares at ex dividend prices. The spread between cum div and ex div prices =
arbitrage opportunities. The careful and systematic way taxpayer bought and sold share + degree of
repetition and substantial turnover pointed out that = carrying on a business.
(9)
Weight up all the factors (substance over form)
[Case] Deane & Croker v FCT – not carrying on business (substance over form)
Page 17 / 61
A taxpayer had entered into a partnership designed to carry on a purported “business” of share trading, for
the purpose of a Curran tax minimization scheme. **The Court focused on substance rather than form,
commenting that the loss was designed only to secure a tax loss or advantage, and that none of the
participants was in reality concerned with the small commercial profit.
Athletic pursuits/SPORT can constitute of a business (pg247/slide11)
[Case] Stone v FC of T (+ see Kelly’s case) - Income
The taxpayer, a police officer, competed as a javelin thrower at national and international sporting events.
He received prize money ($93,429), appearance fee ($2700), grants ($27,900) and payment from sponsors
($12,419). ** The High Court held that activities undertaken = business, thus amount received = Y nature.
This is the case even though her motivation ≠ make money, but to excel in sport - Fees = money for services
provided. Also, if not for those monetary prizes, she would not have excelled and competed at highest level.
Illegal activities can constitute of a business (pg248/slide11)
[Case] La Rosa v FCT- Business/deductible
The taxpayer had been engaged in an illegal drug dealing business. The taxpayer was allowed deductions for
money that had been robbed from him during an attempted drug deal. **The Full Federal Court held that
purpose of tax laws = tax taxable Y, but ≠ punish wrongdoing. Thus, the deduction should be allowed.
(Note: Shortly after that case, s26-53 ITAA97 was introduced to expressly deny deductions for
losses/outgoings relating to commission of certain offences.)
Business v/s Hobby or Pastime (Gambling) (pg248/slide11)
 Gambling = Business
[Case] Trautwein v FCT (pg249)
Taxpayer worked in the hotel industry and had a keen interest in horse racing. He devoted
substantial proportion of time and effort to extract min results from betting activities by
establishing a breeding and stud farm. He trained his own horse whose are under lease. ** The HC
held that in regards to the system, extent, frequency, continuity and volume of betting transactions,
taxpayer’s activities = part and parcel of carrying on a horse-racing business.
[Case] Prince v FCT (see pg249)
 Gambling = Hobby/Pastime
[Case] Martin v FCT (pg249)
The taxpayer ran hotel and farming businesses that occupied most of his time. He placed
considerable number of bets, attended only 1 racecourse and usually place no more than 1 bet on
each race. He also raced and bred his own horse, etc. ** The High Court held that despite these
factors ≠ business because taxpayer should be more involved than a person merely vigorously
pursuing a hobby. The evidence must establish a systematic and organized approach towards
gambling with clear profit-making purpose and a design to eliminate element of chance.
[Case] Brajkovich v FCT (see pg250)
Disposal of Property/Ordinary proceeds of a business (pg250/slide14-15)
Proceeds from the disposal of trading stock = ordinary income (eg. shoe shop sells the shoe), however,
proceeds from the disposal of other assets (eg. sells shoe shop) = capital (Merv Brown Pty Ltd v FCT)
EXCEPTIONS:
1) Banks, investment & insurance companies
[Case] GRE Insurance v FCT
Profit made from sale of their Y-earning assets ≠ Y nature as they are merely realizing capital assets
or changing their investment. **Full Federal Court held that an insurance co. was assessable on
profits made from sale of shares to its subsidiary. The profit of insurance co. and banks are derived
from the investment of their circulating capital.
2) Leasing companies
Page 18 / 61
[Case] GKN Kwikform v FCT (pg255)
GKN was in the business of hiring out scaffolding, but charged customers the retail list price if
scaffolding was not returned. **The Court held that the amounts received for failure to return
scaffolding were income, being a regular and ordinary incident of GKN’s business.
Commencement of business
Preparatory or Preliminary activities
[Case] Softwood Pulp & Paper Ltd v FCT – Preparatory activities not deductible
A Canadian firm conducted investigations to determine whether a paper mill would be viable in a particular
area. The taxpayer company was then incorporated in Australia to carry out further feasibility studies and to
run the paper mill, should the venture proceed. The Canadian co. ultimately abandoned the project. The
taxpayer derived substantial income from the paper mill project, but claimed deduction for expenditure
incurred on investigating the feasibility of the project, and certain follow-up expenses. **The Court held
that the expenses were not incurred in the ‘carry on’ of the business, since the business hasn’t started yet.
[Case] Osborne v FCT – Preliminary activities not deductible
The taxpayer had leased certain land, intending to be used for farming. He investigated the feasibility of
growing chestnuts, and entered into a contract to buy chestnut plants and seedling. There was a nitrogen
deficiency in the soil, which the taxpayer took steps to remedy. However, the project was abandoned before
any further steps could be taken. **The Court held that the actions taken = part of carrying on a business
and therefore the taxpayer had commenced carrying on a business of primary production. However, he was
not entitled to deduct cost of preparing the ground for planting as they were capital expenses.
[Case] Griffin Coal Mining - not related to existing business NOT deductible
FFC disallowed coal mining co. deductions for feasibility study expenditure relating to construction of an
aluminum smelter. Expense is not related to existing business, but to formation of potential new source of Y.
Experiments-Pilot Projects and Preliminary business
Normally pilot project & feasibility studies = preliminary expenditure, = capital in nature, i.e not deductible.
[Case] Ferguson v FCT - not deductible
**The Court held that Ferguson was carrying on a “preliminary business” via which he would in due course
build up a herd of breeding cows sufficient to enable him to engage in wider business that he ultimately
intended to.
Termination of Business (slide 13)
Whether a business has terminated depends on:
1) Intention of its controller
2) Nature of business
3) Reason for the cessation or run-down of trading activities
4) Length of time of cessation
[Case] AGC (Advances) Ltd v FCT – deductible (not yet stop the business)
A company had carried on a business of providing finance by way of loans and hire purchase arrangement. It
traded unprofitably, and entered into a scheme of arrangement with its creditors, suspending its business
operations for approximately 1 year. At expiration of that period, the co. was taken over by AGC Ltd – name,
premises and clientele were changed, and it resumed financing activities. *The court held that the taxpayer
carried on the same business, thus it is allow to deductible. And, AGC’s business had not been terminated.
[Case] Queensland Meat Export Co Ltd v FCT – deductible (not yet stop the business)
The taxpayer (a meat company) was allowed a deduction for the costs of maintaining its Brisbane works for
some 3 years in which those premises were not being used for the production of assessable income because
the taxpayer was unable to obtain sufficient cattle to justify opening of the premises, due to competition
Page 19 / 61
from a new abattoir. **The Court held that the ‘closure’ was temporary, forced upon the co. by adverse
trading conditions, and that the taxpayer maintained the requirement for income-producing purposes. The
taxpayer may continue carry the business, thus the expense is deductible.  (see slide 13 for more details)
-------------------------//-------------------------
Chapter 13 – Ordinary Income
 Compensation amounts and reimbursement (FTL pg264-271)
Compensation receipt:
(a) Compensation for loss of income = Income s15-30 and s6-5
(b) Compensation for loss of right to earn income = capital
(c) If payments relates to BUSINESS STRUCTURE = capital
Compensation Receipt
Income Nature
Capital Nature
Payments that replace, substitute, or
compensate a taxpayer for the loss of
revenue items or amounts that would
have been received on income a/c
Payments that replace, substitute,
or compensate a taxpayer for the
loss or destruction of capital
assets
(a) Compensation for loss of trading stock = Income
[Case] Wade v FC of T (pg265)
The taxpayer, a dairy farmer received a lump compensation for the loss of his cows. **The Court held that
the receipt = income to taxpayer. The dairy cows were taken into a/c as trading stock under the statutory
definition (s70-10 ITAA97). Any source representing items on a revenue a/c = received by way of revenue.
(b) Compensation for loss of income under insurance policies = Income
[Case] FC of T v Smith
Taxpayer, a medical practitioner was injured in an accident and received amount under personal disability
insurance policy. **HC held that insurance payment = income nature. While policy insured taxpayer against
loss of the ability to earn Y, which was a capital asset, the payment was made in ‘substitution for Y’, thus =
revenue receipt.
(c) Compensation for cancellation of employment contracts = Income or Capital
[Case] C of T (Vic) v Phillips (pg265) = Income
The taxpayer, MD of a theatre co. is required to retire before end of contract. He was paid by way of
compensation by same amount as his intended salary. ** The High Court held that payment received “be
regarded as same nature as payment it replaced”. Since payment replaced = salary, it is Y nature.
[Case] Scott v C of T (NSW) (different from Phillips case) = Capital
The taxpayer, chairman of a statutory board was given compensation because his job/position had been
dissolved/abolished. Here, compensation preventing him to continue employment ≠ Y, but = capital nature.
(d) Compensation for closing down or sterilization of capital assets = Capital
[Case] Glenboig Union Fireclay Co Ltd v IRC (pg266/L6 slide4)
The taxpayer carried on a business of mining and selling raw fireclay. It held leases of land containing
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deposits of fireclay, with the lines of a particular railway company running over part of the land. The railway
company exercised its statutory right to require the fireclay under its lines to be left unworked, and paid an
amount to Glenboig as compensation. **The Court held that the compensation was capital in character,
because Glenboig was permanently deprived of the opportunity to carry on its trade or business in relation
to the fixed asset (fireclay) in the affected areas (permanent loss of a fixed asset).
[Case] Federal Coke Co Pty Ltd v FC of T
Federal Coke supplies its parent company, Bellambi, and parent sold to customers. One of its customers, Le
Nikel wished to reduce the amount of coke to be purchased from Bellambi in consideration for $1m
compensation. After the result, taxpayer’s market for coke was reduced, and forced to closure. **The Court
held that the payment was a ‘windfall gain’ in the nature of a gift. It is not the product of any business or
any Y-producing activities. Thus, = capital in Federal Coke’s hands, and not part of its assessable income.
(e) Compensation for cancellation of trading contracts = Income
[Case] Heavy Minerals Pty Ltd v FC of T (pg267/ L6 slide5)
The taxpayer obtained right to a rutile mining lease, and entered into forward contracts to supply overseas
customers. After some time, the world rutile market collapsed, and the overseas purchasers cancelled their
contracts in return of various lump sum compensation payments. After those cancellations, taxpayer
decided to temporarily close down its plant, until forced to cease business. **The Court held that the lump
sum compensation payments to Heavy Minerals = Income nature.
[Case] Liftronic Pty Ltd v FC of T
Taxpayer sold, installed and maintained life systems. He purchased defective equipment from Hyundai and
brought action for breach of contract in Supreme Court of NSW. He received a sum of money for “loss of
profits”. ** The Federal Court characterized amount = income, because the breaches did not destroy
goodwill or earning capacity of Liftronic. The Y earning asset was not sterilized/destroyed, but only a ‘mere
restriction of trading opportunities’.
(f) Compensation for cancellation of structural contracts = Capital
[Case] Van den Bergs Ltd v Clark (slide 6/pg268)
Taxpayer was a margarine manufacturer and distributor in Europe. But due to heavy competition in EU,
there was agreement btw competitors to respect sales to a particular area so there is share of profit among
them. In this case, Van den Berg gave up some of his areas in return for compensation. The structural
contract was part of the capital structure of the business.
(g) Compensation for cancellation of agency agreements (pg268/ L6 Slide7)
 Amounts received for the cancellation of agency agreements = CAPITAL, where the agency
agreements are fundamental and necessary to the continued operation of the taxpayer’s business
[Case] Californian Oil Products Ltd v FC of T = Capital
The taxpayer, an oil products distributor received 10 half-yearly payments of £7000, each for cancellation of
its exclusive agency arrangement with its supplier. ** The High Court held that amount received for
abandonment of the only business the taxpayer conducted = capital nature.
 However, amounts relating to the cancellation of agency agreements = INCOME, where the
agreements are not integral to the continued operation of the taxpayer’s business as a whole
[Case] Allied Mills Industries Pty Ltd v FC of T = Income
Taxpayer was appointed by Arnotts as the sole distributor of its Peek Frean’s biscuits. Later, Arnotts wished
to take over the distribution & paid a lump sum ($372,700) to the taxpayer to cancel distribution agreement.
**The FFC held that the lump sum payment = Y nature when considering size, structure and activities of
taxpayer as a whole. The taxpayer had not ceased activity, but only loses some anticipated profits.
(h) Compensation payments that are undissected lump sums (pg269/ L6 Slide8)
Courts are generally prepared to apportion compensation receipts where it is possible to dissect them into
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distinct income and capital components (Federal Wharf Co Ltd v DFC of T)
[Case] Federal Wharf Co Ltd v DFC of T = Capital
When it’s not possible to distinguish between Y and capital components, the entire amount usually = capital
[Case] McLaurin v FC of T = Capital
Lump sum of £12,350 received to settle damages relating to fire damaging land, fences and livestock. The
court could not apportion and dissect amount between Y and non-Y component, ‘whole’ amount = capital.
[Case] Allsop v FC of T = Capital – same as in McLaurin case (pg 269)
[Case] FC of T v Spedley Securities Ltd = Capital
The taxpayer, a merchant bank is paid a % of the loan amount as commission by Santos to secure a $65m
loan. Santos terminated the agreement after taxpayer completed the job. Evidence shows that it damaged
reputation, indicated by a loss in confidence. Santos paid the taxpayer a lump sum of $200,000 in full
satisfaction of all rights taxpayer had against Santos in relation to termination of agreement. ** Full Federal
Court relied on McLaurin and Allsop. It concludes that apportionment of the lump sum between
compensation for damage to goodwill and loss of commission, the entire lump sum = CAPITAL.
[Case] FC of T v CSR Ltd
(i) Reimbursement and refunds
[Case] FC of T v Rowe = Capital
Taxpayer received an ex gratia payment from Queensland government to reimburse him for legal costs that
he had incurred in relation to a successful action against the local council for wrongful dismissal. **The
court allowed deduction for his legal cost, since reimbursement ≠ Y as it was in no sense a reward for his
services, thus = CAPITAL
[Case] HR Sinclair & Sons Pty Ltd v FC of T = Income
Taxpayer carried on business as timber merchant. He was granted a license for cutting down trees from
state forest. He paid royalties at a determined rate. From 1957 to 1960 income years, he paid royalties at a
rate claimed by FC (Forest Commission) who miscalculated the formula to an excessive rate. FC accepted the
taxpayer’s objection and refunded him. Refund = ordinary business receipt and = INCOME. (pg 270)
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Chapter 13 – Ordinary Income
WEEK 4
 Extraordinary and Isolated Transactions (FTL pg242-246 & 258-263)
To determine whether a receipt Y from ordinary proceeds, it is necessary to determine:
1. Precise nature and scope of the business
2. Relationship between that business and the receipt
Under “Californian Copper” principle, the receipts = assessable income based on its profit motive intention,
therefore ordinary income under s6-5 ITAA97. ** REFER TO PG 242 or SLIDE 5 of L7 or NOTES pg 19**
Identifying the normal proceeds of a business
Step1: Identifying the precise scope and nature of the taxpayer’s business
[Case] GP International Pipecoaters Pty Ltd v FC of T –income/ assessable
The taxpayer was a joint venture company incorporated for the sole purpose of carrying out a contract with
the State Energy Commission of Western Australia which required the taxpayer to erect a pipe-coating plant
complex, and to use that plant to coat pipes. The Commission paid the taxpayer $4.675m “establishment”
costs in 3 equal installments. This enables the taxpayer to erect the plant complex without having to borrow
money, i.e. enabling the taxpayer to avoid incurring interest and other financing costs. **The Court held
that the $4.675m = assessable income. All amounts paid to the taxpayer under the contract were ordinary
proceeds of the company’s business.
 Effect of expansion or diversification of business
[Case] Merv Brown Pty Ltd v FC of T – capital/not assessable (pg251 or Notes pg 21)
The co. sold clothing by wholesale, some of the clothing being imported into Aussie by the taxpayer under
import quotas. Following changes in government policy, the taxpayer decided to concentrate on its more
profitable lines, and accordingly sold certain of the quotas for less profitable lines. **The Court held that
proceeds from sales of quotas = capital in nature (not assessable), rested on the view that the sales were
predominantly a business following the change of policy. Eg. If taxpayer runs a retail ‘fish and chips’ shop,
the sales of fish and chips, drinks and related items is clearly part of the “normal proceeds” of the business.
Step 2: Establishing a sufficient nexus between the business and the amount
[Case] GKN Kwikform Services v FC of T (pg 255)
GKN was in the business of hiring out scaffolding, but charged customers the retail list price if scaffolding
was not returned. **The Court held that the amounts received for failure to return scaffolding were income,
being a regular and ordinary incident of GKN’s business.
[Case] Memorex v FC of T (pg 255)
** Full Federal Court held that taxpayer was not only in business of leasing computer equipment but also
selling them, which result in profits made from sale of outdated equipment. Thus, = income nature.
ISOLATED TRANSACTIONS
Where taxpayer, not previously engaged in business, decide to carry out an isolated venture with a profit
making motive.
[Case] Whitfords Beach v FC of T = Income (pg245)
Co. formed by 3 fishermen who acquired land to provide themselves access to fishing shacks on the beach.
They sold their shares to a group of co. that intended to develop and sell the land. **The High Court found
that all these were beyond ‘mere realization of asset’, but rather had ventured into land development
business. The sale led to taxpayer being “transformed from a co. which held land for domestic purpose of its
s/h to a co. whose purpose was to engage in commercial venture with a view to make profit”. Therefore = Y
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 However, this was contested by Mason J. who held that the land was subdivided, etc, so as to be to its
best advantage. If you want to sell a house, you don’t necessarily need to sell it as it is, you can do
landscaping or repaint it so as to meet current standards and thus more saleable. (Contrast with
‘Scottish Australian Mining’ case)
[Case] California Copper Syndicate Ltd v Harris = Income
A company sold copper-bearing land to another co. in exchange of being allotted shares in that co. Taxpayer
argued that it should not be assessed on profit made on the basis that it had substituted 1 capital asset
(land) for another capital asset (shares). **The Court found that taxpayer wanted to benefit from profit of
sale of land since it never had enough funds to mine the land. Therefore, profit from sale ≠ mere
substitution but = assessable trading transaction.
[Case] Scottish Australian Mining = Capital
Mining company mined its land for coal until 1924 when the coal seam was exhausted. The co. then decided
to sell the land. So as to receive a high price, it spent in subdividing the land, constructing roads, schools,
etc. **The Court held that the profits on sale of the land were not assessable as the co. had merely taken
the necessary steps to realise the land to the best advantage, which was a capital asset acquired for coal
mining purposes. The first intention was mining business and not land development. Thus = CAPITAL.
EXTRAORDINARY TRANSACTIONS (slide7)
Where there is a pre-existing business and a gain is made from a transaction outside normal business
activities.
[Case] The Myer Emporium Limited v FC of T– Ordinary income (pg 258/slide7)
The taxpayer, Myer Emporium (ME), undertook a pre-arranged plan to obtain working capital from an
outside financier. ME lent $80m of its funds to Myer Finance (MF) (a member of the same corporate group)
at an interest rate of 12% p.a. for a term in excess of 7 days. 3 days later, it assigned its right to interest
under the loan to the outside financier (Citicorp) for a lump sum ($45.37m), retaining the right to receive
repayment of the principal sum. **The Court held that the $45.37m received by ME from Citicorp = Income
under the ordinary Y provision (s25 (1) ITAA36, s6-5 ITAA97), and endorsed the basic principle in Californian
Copper Syndicate as interpreted in Whitfords Beach. The Court viewed the 2 transactions as interrelated
since taxpayer (ME) would not have made the loan to MF unless it knew in advance that Citicorp would pay
for the assigned interest.
Myer Emporium
(TAXPAYER)
Pay a lump sum
now to Myer
Emporium
Lends $80m @ a commercial
rate of 12.5% p.a
Myer Finance
Pay interest @
12.5%
p.a
to
outside financier
Citicorp
Myer finance, instead of
repaying the interest to Myer
Emporium directly- sell the
right to interest entitlement
to the outside financier who
pay a lump sum NOW to
Myer Emporium
High Court decision had 2 ‘strands’:
 1st Strand (pg 258/60 & slide 8)
Issue: Is the $45.37m received by taxpayer constituted income?
The High Court held that the $45.37m = INCOME nature because the court viewed the 2 transactions as
interrelated since taxpayer (ME) would not have made the loan to MF unless it knew in advance that
Citicorp would pay for the assigned interest. Also, there was an intention or purpose of making a
profit-interest rate charged through the arrangement between ME and MF.
Note: For 1st strand of Myer to apply, taxpayer must have ‘significant’ or ‘not insignificant’ purpose of
making profit from the transaction at time entering it (FC of T v Cooling). Where this requirement is absent,
1st strand of Myer does not apply (Henry Jones (IXL) Ltd v FC of T and SP Investments Pty Ltd v FC of T)
Page 24 / 61
[Case] Westfield v FC of T (1st strand of Myer did NOT apply) ≠ Income
The taxpayer’s main activity was design, construction, letting and management of shopping centers. The
taxpayer had acquired land for $450,000 for the original purpose of developing a shopping centre but was
later on sold to AMP for $735,000, on the basis that AMP would employ the taxpayer to design and
construct their shopping centre. The Court held that the profit on sale to AMP = non-assessable income
since sale of land was not the original purpose, but rather construction development and leasing of space.
For the 1st strand of Myer to apply, the transaction that generates profit must be of commercial transaction
and at time transaction entered, there must have been a purpose of profit-making.
LIMITATION of Myer Principal: the Myer’s decision does not mean that every profit made in the course of
carrying on business activities must be of an income nature.
[Case] Moana Sands Pty Ltd v FC of T (1988) = Income
Taxpayer had acquired beachside land for purpose of carrying on a business of selling sand. It was intended
that, once sand had been sold, the land became ‘ripe for subdivision’. Council approval to subdivide land
was never granted and eventually continued by the Coast Protection Board – profit to taxpayer. Even though
profit arose out of an isolated transaction, it is = INCOME as taxpayer acquired land not only to sell sand but
also to subsequently sell the land at a profit (ultimate purpose was to make profit from its sale.)
[Case] Cooling v FC of T (1988) ≠ Income (slide9/pg255)
 2nd Strand (pg 260 – 261)
Another line of reasoning in Myer that led the court to conclude $45.37m = assessable Y.
The Court held that: Where future right to interest is converted into a present lump sum amount, the latter
= INCOME nature since it replaces the future interest which, when derived, would be treated as income.
Substitution of a present day lump sum for a future income stream ≠ capital, the lump sum takes on the
same character as the amount which it replaces namely “income”.
[Case] Henry Jones (IXL) Ltd v FC of T (1991) = Income
IXL decided to quit the canned foods market, and accordingly (with subsidiary) entered into agreements
(basically) to grant two companies’ sole and exclusive use of certain labels and trade mark for a period of 10
years, in return for royalties of 5% of worldwide sales (with specified minimum payments). In accordance
with its pre-existing aim of converting the future royalty income into a tax-free capital sum, IXL entered into
arrangements with Citicorp Canberra Pty Ltd under which IXL transferred all its right, title and interest under
the royalty agreement to Citicorp, which in return paid IXL a lump sum of around $7.58m. **The Court held
that the lump sum = assessable INCOME.
[Case] SP Investment Pty Ltd v FC of T (1993) = Income
Trustee had acquired right to iron ore royalties. The taxpayer assigned its royalty rights to National Mutual
Life Association for > 7 years in return for a lump sum payment of almost $4m. **The Court held that:
• 1st strand of Myer did not apply because the right assigned was not acquired with a profit-making
purpose and even if it was assigned with such a purpose there was no profit. However,
• 2nd strand of Myer apply here. The lump sum was paid in substitution for an income stream (royalties)
and, therefore = INCOME nature, even though the taxpayer was not carrying on a business.
 3rd Strand (slide 11)
ME argued that there was no taxable profit since it only received the PV of future Y stream. ** The HCA
rejected that argument on the basis that: Y tax uses accounting records, not economic substance.
See Carden and Henderson cases.
Statutory expansion of the “business proceeds” concept (slide12)
Profit-making undertaking or plans:
S15-15 ITAA97 includes in assessable income a profit that arises in 1997/98 or a later income year from
carrying out a profit that:
a) Is assessable as ordinary income under s6-5 ITAA97, or
b) Arises in respect of sale of property acquired ≥ 20 Sept 1985 to which CGT provision would apply.
Page 25 / 61
Exclusion: s15-15 does not apply to profit that is assessed under s6-5 or property sold after 20 Sept 1985
which is subject to CGT.
S15-15 can apply when there is a sale of pre-CGT property (acquired < 20 Sept 1985) that was not originally
acquired with a profit-making intention, and that has subsequently become part of a profit-making
undertaking or plan.
Chapter 34 –Termination and Unused leave Payments (Week4/ pg799-805)
4 main types of income on termination of employment:
1) ETP – Employment Termination Payment (Div 82)
2) Genuine Redundancy Payment (GRP) and Early Retirement Scheme Payments (ERSP) (Div 83-C)
3) Unused Annual Leave (UAL) and Long Service Leave Payments (LSLP) (Div 83-A and 83-B)
4) Superannuation Benefits (Div 301-307)
34.2
EMPLOYMENT TERMINATION PAYMENTS (ETP) (slide 4-21)
ETP = payment received by employee (or by another person after employee’s death) **in consequence of
employment termination, ≥ 1 July 2007. (S82-130 ITAA97)
For payment to be an ETP, it must be received within 12 months after termination of employment, unless
the commissioner decides otherwise or if it is a ‘genuine redundancy payment’ or ‘early retirement scheme
payment’. ETP cannot be rolled over, and must be taken as cash. From 1 July 2007, ETP is deemed to be
received when made. Payment that fail the 12-month test = assessable Y (s83-295)
ETP excludes: superannuation benefits, pensions, annuities, unused annual leave and LSL payment, tax-free
part of genuine redundancy or early requirement scheme payments, certain foreign termination payments,
deemed dividend, capital compensation payment, etc. (s82-135)  (slide6-8)
**In consequence (slide 11)
[Case] Reseck v FC of T
Sum is paid in consequence of the termination of employment when payment follows as an effect or result
of the termination. It is not necessary that termination should be the dominant cause of the payment. A
“consequence” ≠ as a “result”, as it does not import causation but rather a ‘following on’. For a payment to
be ‘in consequence’ here, a “causal connection” must exist between the termination and the payment.
2 Classifications of ETP:
(a) LBTP (Life Benefit Termination Payments) = ETP received by employee whose employment is terminated
(b) DBTP (Death Benefit Termination Payments) = ETP received by another person after death of employee.
 Both LBTP and DBTP consist of a ‘tax-free component’ and/or ‘taxable component’ 
Tax-free component (slide 12-15)
 ‘Invalidity segment’ of the ETP (formula in s82-150). Must satisfy the following conditions:
(a) ETP relates to termination due to ill health (must be certified by 2 practitioners)
(b) Employment stops before last retirement day (65 years old)
Invalidity Segment
=
Amount of ETP
x
Days to retirement
Employment days + Days to retirement
 ‘Pre-July 1983 segment’ (formula in s82-155). Segment = ETP – invalidity segment, which relates to
the employee’s pre 1 July 83 service (s82-140)
Pre-July 1983 Segment =
(ETP – Invalidity Segment) x
Days Pre 1 July 1983
Total Days of Employment
Page 26 / 61
Tax-free component of ETP = non-assessable non-exempt income (NANEI) (s82-10(1), 282-65(1), s82-70(1))
Taxable component (slide 16)
Taxable component of ETP = ETP – tax-free component (s82-145). Tax rate depends on age of employee and
amount received with tax offset. Tax offset puts a ceiling on the tax rate (s82-10(2)-(4))
Treatment of taxable component of ETP depends on:
- Whether it is LBTP or DBTP
- Whether taxable component > “ETP cap amount” (see pg 801)
ETP cap amount for income year 2011/12: $165,000
Taxable component of a LBTP (see table slide 18)
Taxable component of a LBTP = assessable income. A tax offset on LBTP for 2011/12:
Payment Amount
Above preservation Age (> 55 years old)
Below preservation age (<55 years old)
$0 to $165,000 (cap)
Maximum 15% tax
Maximum of 30% tax
Above $165,000
45%
45%
Medicare levy must also be added where appropriate.
 See example (calculation) slide 19-21
Taxable component of a DBTP
It is taxed differently depending upon whether or not the person receiving the ETP is a “death benefits
dependant” as defined in s 302-195
Deaths benefits dependant
• Recipient is a death benefits dependant, the taxable component of the DBTP is NANEI to the extent
that it is < “ETP cap amount” reduced by any earlier DBTP received in consequence of the same
employment termination. Remainder of the taxable component = assessable Y & taxed at 45%
Non-death benefits dependant
• Where recipient is not a death benefit dependant, the taxable component of DBTP = assessable Y.
• Tax offset ensures that the rate of tax on so much of the taxable component that does not exceed
the “ETP cap amount” reduced by any earlier DBTP received in consequence of the same
employment termination does not exceed 30%. Remainder of taxable component is taxed at 45%
 SEE TABLE PG 802 - Summary of taxation treatment of component of an ETP
Other termination payments
Termination payments that would otherwise qualify as ETPs if not for the fact that they are received more
than 12 months after the termination of employment = assessable income (s 83-295)
Transitional Rules
 Pg 802
Unused annual leave and long service leave
o
o
o

Generally included in a taxpayer’s assessable income
Only 5% of ULSL have payments that accrued before 16 August 1978 are assessable (s 83-10, s
83-80 ITAA97)
UAL payments or ULSL payments are made in respect of employment before 19 August 1993, or in
connection with a “genuine redundancy payment”, an “early retirement scheme payment”, or an
“invalidity segment of an ETP or superannuation benefit”, a tax offset applies to ensure that the
rate of tax on such payment s does not exceed 30%
See slides 28-40
Genuine redundancy and early retirement scheme payments

See slides 22-27 (not well developed in book)
Page 27 / 61
WEEK 5
Chapter 22 –Capital Gains Tax (FTL pg433-483)
22.1
INTRODUTION
A history of CGT can be broken down into 3 periods:
• Before the introduction of CGT in 1985 (before intro of CGT) – CGT are disregarded
• From 20 September 1985 when CGT was introduced through to 1998
• From 1998 when CGT provision were written
Most common CGT event = CGT event A1, arising when there is “disposal” of CGT asset.
Capital gain = capital proceeds from disposal > cost base
Capital losses = capital proceeds < cost base
Note that there are special rules relating to foreign residents and deceased estates.
22.2
NET CAPITAL GAINS AND NET CAPITAL LOSSES
Net Capital Gain (pg 434-436 & slides 3-4)
It is included in assessable income (s102-5) and is worked out according to 5 steps:
1) Capital gains are reduced by capital losses made during the Y year.
2) Remaining gains reduced by any losses from previous years.
3) Discount capital gains are reduced by 50%
4) Gains qualified for any ‘small business concession’ are reduced under those concessions
5) Any remaining gain amount = taxpayer’s net capital gain for the year.
Note: those steps help max benefit of CGT discount under Step 3. Thus, it is more advantageous to
follow the above steps when assessing CGT. Net k gain are included in assessable Y.
 See example pg 435
Net Capital loss (pg 436 & slide 5)
Net capital loss = capital losses > capital gains for the year (s102-10(1))
It is not deductible against ordinary Y but can be used ONLY to decrease net k gains in future years (s102-15)
To prevent double taxation (Anti-overlap provision - s118-20), if a gain is assessable under another provision
of the Act, the capital gain is reduced.
22.3
CAPITAL GAINS AND CAPITAL LOSSES
Amount and timing
Loss cannot be carried back to reduce k gain made in previous Y year. To minimize tax liabilities, taxpayers
should ensure k losses occur during Y years in which they make k gains, otherwise losses will be carried
forward into future Y years and their economic value will erode over time with inflation.
Exemptions (slide 7-9)
K gains/losses are generally disregarded if made in relation to assets acquired before 20 Sept 85 (i.e before
introduction of CGT). K gains/losses in relation to: cars, trading stock, collectables of <$500, ETP, super lump
sums, gambling winnings, depreciating assets, main residence, insurance and superannuation, personal use
asset costing ≤ $10,000, collectable costing <$500, non-resident non-taxable property, exempt taxpayers
(religious, charities) are disregarded (see below NOTES or pg449-453)
 Steps involved in dealing with k gains/losses - See DIAGRAM pg 438 
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There are 5 steps that are involved in analysing the CGT:
Step 1: identifying a CGT event
Step 2: Calculate the capital gain or loss
Step 3: Consider any exemptions or exceptions
Step 4: Consider any roll-overs
Step 5: Determine the net capital gain/loss for the income year
22.4
CGT EVENTS – OVERVIEW
See TABLE OF CGT EVENTS on pg 439-444 – describes CGT event, time of event and ways in which k
gain/loss is calculated. If more than 1 CGT event applies, use the one which is most specific to their
situation.
22.5
CGT ASSETS
3 kinds of CGT assets:
(1) Ordinary CGT assets (Subdiv 108-A)
(2) Collectibles (Subdiv 108-B) - [losses from collectible can ONLY reduce k gain from collectibles]
(3) Personal use assets (Subdiv 108-C) – [losses cannot be used against any k gains]
(1)
Ordinary CGT assets
Defined broadly (s108-5(1)) as ‘any kind of property’ or ‘legal or equitable right that is not property’
Property = ordinarily something that can be transferred to others and includes both ‘tangible’ items (like
land and equipment) and ‘intangible’ items (like copyright or patent)
Legal or equitable right that is not property = a right recognized by court exercising its legal or equitable
jurisdiction (Eg: right of patient to sue doctor for negligence and right of a beneficiary to sue trustee for
breach of trust). Those rights ≠ proprietary in nature (not transferable), but enforceable in a court.
Common examples of CGT assets: land, shares, options, goodwill, debts and contractual rights.
(2)
Collectables
Special quarantining rule applies, where k losses from collectables can ONLY be applied against k gains
from collectables (s108-10(1)). Special ‘low value’ exemption also applies, where k gains/losses acquired for
≤ $500 are disregarded (s118-10(1)). Examples of collectables:
- Artwork, jewellery, antiques, coins or medallions.
- Rare folios, manuscripts or books, and
- Postage stamps or 1st day covers (s108-10(2))
- Any interest, debt or option in respect to these assets = collectable (s108-10(3))
[Examples: A acquire gold ring for $400 and antique chair for $2,000. If sold ring @ $800, k gain can be
disregarded since acquisition cost ≤ $500. If chair sold for $1,500, make a loss of $500. Thus can use k loss to
offset k gain]
If taxpayer owns a ‘set’ of collectables that would ordinarily be disposed of together, then if taxpayer
disposes them individually to try benefit from exemption, the ‘set’ would be taken as being a ‘single’
collectable (s108-15)  [See example pg 446]
(3)
Personal use assets
K losses from ‘personal use assets’ are disregarded and thus cannot be applied against k gains (s108-20(1)).
Also, k gain disregarded if acquisition cost of CGT asset ≤ $10,000. Those assets are kept mainly for
taxpayer’s personal use or enjoyment (eg: home TV). It also includes options or rights to acquire assets,
certain debts and non-Y producing/non-business debts.  [See example pg 447]
If taxpayer owns a ‘set’ of personal use assets that would ordinarily be disposed of together, then if
Page 29 / 61
taxpayer disposes them individually to try benefit from exemption, the ‘set’ would be taken as being a
‘single’ one (s108-25, s108-30)
(4)
Separate CGT assets
Certain assets that would be treated as single are deemed to be separate assets under Subdiv 108-D.
(a) Buildings and Structures
Post-CGT (≥ 20 Sept 85) = building treated as separate from land if certain balancing adjustment
provisions for depreciating assets or R&D apply to building or structure (s108-55(1))
Pre-CGT (< 20 Sept 85) = building treated as separate if construction contract was entered into post-CGT
or, in absence of contract, construction commenced ≥20 Sept 85 (s108-55(2))
(b) Adjacent land
Land A acquired ≥20 Sept 85 that is adjacent to land B acquired <20 Sept 85 = treated separate asset if
both lands are amalgamated into 1 title (s108-65) [See example pg 447]
(c) Capital improvements
Treated as separate if:
- Either improvements to land (either pre- or post-CGT) or to pre-CGT assets (not necessarily land).
- Certain balancing adj. provisions for depreciating assets or R&D can apply to the improvements.
- When CGT event happens in relation to pre-CGT asset, its cost base > both ‘improvement threshold’
for Y year in which CGT event happened and 5% of k proceeds from the event (s108-70(2) & (3)).
Improvement threshold for year 2011/12 = $ 130,418 (see pg 448) [See example pg 448]
22.6
SPECIFIC EXEMPTIONS AND SPECIAL RULES (pg 449- 453)
Before/Pre-1985 asset exemption
For purpose of CGT event A1, s104-10(5) states that k gain/loss made on asset acquired < 20 September 85
is disregarded. [See example pg 449]
Motor vehicle exemption
K gain/loss on cars, motor vehicles & similar vehicles are disregarded under s118-5. Definition of ‘car’ =
vehicle carrying a load of < 1tonne or < 9 passengers. A large truck would NOT fall within this exemption.
Main residence exemption
S 118-110: K gain/loss made to a dwelling that is the taxpayer’s main residence is disregarded.
Personal use asset and collectables exemptions
Collectable = k gain/loss on collectables acquired at cost ≤$500 are disregarded (S 118-10(1))
Personal Use asset = k gain/loss disregarded if asset acquired for ≤ $10,000 (S 118-10(3)).
Depreciating asset exemption
Disregarded under s118-24 because k gain/loss of depreciating assets are dealt under capital allowance
regime in Div 40 (see week 9 – Special deductions) [See example pg 450]
Trading stock exemption (pg451)
K gain/loss is disregarded under s118-25 because it is a ‘revenue asset’. Would entitled to deduction of s8-1
Miscellaneous exemption
Exemption of CGT for:
- Decorations warded for valour or brave conduct
- Asset used solely to product exempt Y or NANEI
- Shares in PDF
- Gambling or competitions
Page 30 / 61
-
Compensation or damage for personal and occupational injuries
Superannuation funds
Eligible venture capital investments.
Foreign and temporary residents exemptions
Non-resident only tax on ‘taxable Australian property’ (s885-10)
Deceased estate exemptions (pg 451)
Roll-overs (pg 451)
Special rule to prevent double taxation
To prevent duplication, K gain from CGT is reduced if because of CGT, amount is included in assessable Y,
exempt Y or NANEI under non-CGT provision (s118-20). K gain reduced to 0 (zero) if ≤ amount included. If k
gain > amount included, it is reduced by the amount included.  [See example pg 452]
Special entity rules (pg 452-453)
22.7
CGT EVENT
A1 – Disposal of CGT asset (pg 453)
CGT Event A1 happens if there has been a ‘disposal/sale/gift of an asset’, i.e through ‘change of ownership’.
It must also be a change in both legal and beneficial ownership.
Time = when the contract for the disposal is entered into or, if there is no contract, when the change of
ownership occurs (s104-10(3)) (Sara Lee Household & Body Care v FC of T) – pg 454
Exceptions: K gain/loss disregarded if: asset was acquired < 20 September 1985 or asset is a lease which
was granted, renewed or extended before that day (s104-10(5)).
Capital Gains and Capital Losses
Capital Gain = Capital Proceeds > Cost Base
Asset owned < 12 months  Capital gain = Capital Proceeds – Cost Base
Asset owned ≥ 12 months  Capital Gain = Capital Proceeds – Indexed Cost Base (Indexation frozen at 30
September 1999)
Capital Loss = Capital Proceeds < Reduced Cost Base
Capital Loss = Reduced Cost Base – Capital Proceeds
(Discount k gain ≥ 21/09/99) Net Capital Gain = Capital gain – capital loss. But if k gain < k loss, net capital
gain can be a max of 0, cannot be negative. The remaining net k loss can be carried forward indefinitely.
 Example of when CGT event A1 and timing occur, and what capital gain/loss amount to pg 455
22.8
COST BASE AND REDUCED COST BASE (pg 455)
Cost Base: (pg455 & slide 25)
The 5 elements of the Cost Base – s110-25:
(1) Total acquisition cost of the asset
(2) Non-deductible cost incurred to acquire the asset (eg: stamp duty, brokerage fees, legal cost, etc…)
(3) Non-deductible cost of owning the asset (e.g.: interest on money borrowed, cost of maintaining,
repairing or insuring, land tax…) Only applicable to asset acquire after 20 August 1991.
(4) Capital expenditure incurred to increase asset’s value
(5) Capital expenditure incurred to gain, keep & defend taxpayer’s title/right to the asset
Reduced Cost Base: (pg456)
Page 31 / 61
The 1st, 2nd, 4th and 5th element is same as for cost base, except the 3rd element, which is a ‘balancing
adjustment’. Elements of a reduced cost bas CANNOT be indexed.
Special Rules about Cost Base (slide 26-25):
Market Value substitution rule
 See Slide 27 + Example pg458
Indexed Cost Base (Div 114)
 See Slide 28 + Example pg458
Asset acquired ≤ 11.45 am on 21 September 1999 may be indexed for inflation, provided the asset has
been held for > 12months.Reduced cost base element CANNOT be indexed, i.e. cannot increase amount of
k loss. Indexed cost base always ≥ cost base. Indexation is frozen at 30 Sept 99 because of new CGT rules.
Reduced Cost Base (s110-55)
 See Slide 29 + Example pg456
22.9
CAPITAL PROCEEDS (pg 461& slide 18)
Special Rules about Capital Proceeds:
Market Value substitution rule (s116-30)
 See Slide 20 + Example pg461
Apportionment rule (s116-40)
 See Slide 21 + Example pg461
Non-Receipt rule (s116-45)
 See Slide 22 + Example pg462
Repaid rule (s116-50)
 See Slide 23 + Example pg462
Assumption of Liability rule (s116-55)
 See Slide 24 + Example pg462
22.10
DISCOUNT CAPITAL GAINS (pg 463 & slide 31)
 Occur where asset is acquired ≤ 21 September 1999, but CGT event/sale happened after 21 Sept 99.
A ‘discount’ k gain = k gain if satisfies the following requirements (s115-5):
• K gain must be made by an individual, complying superannuation entity or trust
• CGT event occur > 21 Sept 99
• K gain must be calculated without taking indexation into a/c.
• CGT asset acquired ≥ 12 months before CGT event/sale of asset.
CGT discount ONLY applies to k gain, but NOT for k loss.
 50% discount for Individuals and trusts
 331/3% for Complying Superannuation entities
 0% / NO discount for companies
Discount method was introduced as from 21 September 1999.
Discount method ONLY applicable to individual, NOT COMPANIES
 See Example of using both indexation and discount method on slides 33-36
Page 32 / 61
Asset acquired:
< 19 September 1985
> 19 September 1985
≤ 21 September 1999
(before11.45 am)
> 21 September 1999
> 21 September 1999
Asset sold/ CGT event happen:
Anytime
≤
21 September 1999
>
21 September 1999
Asset hold for:
≥ 12 months
≥ 12 months
>
>
≥ 12 months
< 12 months
21 September 1999
21 September 1999
CGT Method
NO CGT
Indexation Method ONLY
Both Indexation and
Discount Method
Discount Method ONLY
NO method available
SPECIAL CGT event D1, D2, F1, F2, I1, etc…  Lecture Week 5 Part 2
CGT Event 1 – Disposal of a CGT Asset where Asset Held < 12 Months
Sam purchased 1,000 Commonwealth Bank Shares on 1 December 1998 @ $11 per share. Brokerage costs on purchase
were $165 and Stamp Duty was $15. Sam sold the 1,000 shares on 9 July 1999 @ $18 per share, with Brokerage costs on
sale being $ 270 and Stamp Duty was $25.
Calculation of Capital Gain
Capital Proceeds on Disposal of CBA Shares
$18,000
Less Cost Base:
(Not Indexed Cost Base as asset held < 12 months)
Cost on acquisition
$11,000
Incidental costs of acquisition
$180
Incidental disposal costs
$295
($11,475)
Capital Gain
$6,525
(CGT Event A1 – Disposal of a CGT Asset where Asset Held > 12 Months
Heather purchased a block of land on 1 December 1995 for $200,000. In February 1996 she cleared the land of trees and
scrub to make it more attractive for resale. This cost her $1,500. She also paid council rates in November 1996 of $800 and
November 1997 of $1,000. Heather sold the land in August 1999 for $250,000.
Calculation of Capital Gain
Capital Proceeds on disposal of land
$250,000
Less Indexed Cost Base(Asset held > 12 months):
123.4
Costs of acquisition of land ($200,000 x ( /118.5)) =
$208,200
123.4
$1,556
Capital Enhancement Expenditure ($1,500 x ( /119.0)) =
Non-Capital Costs of Ownership (These costs are never indexed)Council Rates =
$1,800
($211,556)
Capital Gain
$38,444
(CGT Event 1 – Disposal of a CGT Asset: Calculation of Capital Loss – No Depreciation/Balancing Charge) No index for
reduced cost base
Max purchased 1,000 WMC Shares on 1 December 1996 @ $8 per share. Brokerage costs on purchase were $120 and
Stamp Duty was $15. Sam sold the 1,000 shares on 10 August 1999 @ $4 per share, with Brokerage costs on sale being
$60 and Stamp Duty was $15.
Calculation of Capital Loss
Capital Proceeds on Disposal of WMC Shares
$4,000
Less Reduced Cost Base:
(No Depreciation/Balancing Charge)
Consideration in respect of acquisition
$8,000
Incidental costs of acquisition
$135
Incidental disposal costs
$75
($8,210)
Capital Loss
($4,210)
Page 33 / 61
WEEK 6
Chapter 7 – GST (Goods and Services Tax)
7.1
GST =
•
•
•
•
•
•
•
•
•
•
INTRODUCTION
A form of VAT (Value Added Tax).
Introduced in Aussie on 1 July 2000.
A transactional tax operating along the supply chain – a multi-level tax.
Fall on end-consumer who are NOT entitled to any GST credits
GST revenue paid by Commonwealth to the States and Territories.
Flat rate of 10% (10% of value of a good or service (s9-70) OR 1/11th of the Price (s9-75))
Price = Inclusive of Tax v/s Value = Exclusive of tax
Also applicable on imports
NO GST on ‘GST-free’ or ‘input taxed’ supplies or ‘non-taxable importations’.
Goods and Services Tax Act 1999 (GSTA) and GST Regs (1999)
Registered entities charge GST on their supplies/outputs & are entitled to input tax credits (credits on GST
charged on their inputs like raw materials).
Unregistered entities can charge GST but is NOT entitled to input tax credit.
7.2
BACKGROUND TO THE INTRO OF GST
Read more on page 108-110 (GST replaces sales tax, Political background, International background)
+ See table outlining the GST rate and the years some countries introduced the GST (pg 110)
7.3
BASIC PRINCIPLES OF GST
GST and input tax credits
Aussie’s GST system is built around 2 key concepts:
(1) Charging GST
– On ‘taxable supplies’ (Registered entities ONLY) and ‘taxable importations’ (Entities – whether or
not registered or need to be registered) (GSTAs7-1)
(2) Claiming ‘input tax credits’
– On ‘creditable acquisitions’ and ‘creditable importations’ (Registered entities ONLY for both)
(GSTAs7-1)
Concept of “Registration” = Very Important
Basic effect of GST
Since end-consumers are not registered entities, they cannot claim input tax credits. GST operated as a de
facto (genuine) ‘consumption tax’ as it is the end-consumers that ultimately bear the cost of GST.
GST is a transaction tax
GST is both a ‘consumption tax’ and a ‘transaction tax’ (= a particular form of transaction, namely supply)
[Case] FCT v Reliance Carpet Co Pty Ltd (2008) – (pg112)
Charging GST
Supplies
Kind of Supply
Is GST charged on ss?
Taxable Supply
GST-free Supply
Input taxed Supply

×
×
Importations
Is GST charged on
Kind of importation
importation?
Taxable importation

Non-Taxable importation
×
Page 34 / 61
Input tax credits
Acquisitions
Kind of Acquisitions
Is an input tax credit
available for GST
charged on taxable ss?
Acquisition used to
make taxable ss
Acquisition used to
make GST-free ss
Acquisition used to
make input taxed ss


×
Importations
Is an input tax credit
available for GST
Kind of importation
charged on taxable
importation?
Importation used to

make taxable ss
Importation used to

make GST-free ss
Importation used to
×
make input-taxed ss
 See EXAMPLE of taxable ss, GST-free ss and Input taxed ss on pg 114
7.4
NET AMOUNT FOR A TAX PERIOD
Tax periods
Generally, tax period of 3 months (Quarterly basis ending 31 March, 30 June, 30 September and 31
December) (s27-5 GSTA)
• Entities with ‘GST turnover’ ≥ $20m ‘Tax period turnover threshold’ = must use monthly tax periods
(s27-15). [i.e GST amount ≥ $2m]
• Entities with ‘GST turnover’ < $20m = can use either monthly or quarterly tax period.
Net Amount
Net amount = amount of tax payable by entity OR amount of refund entity is entitled to receive.
Positive (+ve) net amount = Entity pay to the ATO
Negative (-ve) net amount = Entity receive refund from the ATO.
GST on taxable importation is not taken into account in calculating net amount because it is paid separately
at time and place customs duty is payable.
Net Amount = GST – Input Tax Credit + Increasing Adjustments – Decreasing Adjustments
Note: Increasing and decreasing adjustments are applicable where adjustment events occur (eg: write off
bad debts or when changes in creditable purpose arise).
7.5
REGISTRATION OF ENTITIES (pg 116)
Definition of entity
An ‘entity’ is defined in s184-1(1) GSTA as:
•
•
•
•
Individual
Body corporate
Corporation sole
Body politic (eg Government)
• Partnership
• Unincorporated association or body of persons (eg Clubs)
• Trust
• Superannuation fund
Supplies and acquisitions made by partners of a partnership or members of committee are taken to be
made by the relevant partnership, unincorporated association or body, rather that the legal person who is
the partner or member (s184-5).
Registration requirements (slide 10-11)
Entity may be registered for GST if carrying on an enterprise (s23-10), BUT it must be registered for GST if:
Page 35 / 61
(1) Carrying on an ‘enterprise’ AND
(2) ‘GST turnover’ meets the ‘registration turnover threshold’ of $75,000 ($150,000 = non-profit body).
Turnover threshold comprises of both current and projected GST turnover and excludes input taxed
ss, sale of k assets, ss not connected with Australia (slide 11)
Entities that must register irrespective of GST turnover:
• Taxi drivers (s144-5)
• Representatives of incapacitated entities (s58-20)
• Resident agents acting for non-residents (s57-20)
Example:
Arthur runs a flower stall. His GST turnover = $30,000. He may not register for GST since his GST turnover <
$75,000. However, if GST = $100,000, he would have to register for GST. If Arthur was a taxi driver, he would
need to register for GST irrespective of his GST turnover.
7.6
TAXABLE SUPPLIES (pg 118-126)
S9-40 GSTA = entity is required to pay GST on ‘taxable supplies’ it makes.
Definition of taxable supply
 See slide 5
Concept is defined in s9-5. Definition contains +ve and –ve elements.
 Positive elements of s9-5
 Negative elements of s9-5
 Meanings of terms used in s9-5
[Positive elements]Under s9-5 6 elements are required to constitute a taxable supply:
a) Entity makes a supply of goods and services
b) ss made for consideration
c)
ss made in the course or furtherance of an enterprise
d) ss is connected with Australia
e) By a registered entity (or an entity required to be registered)
[Negative elements] A supply is NOT a taxable ss to the extent that it is GST-free (Div 38) or input
taxed (Div 40)
(a) Element 1: Supply
 See slide 6
Plus:
Note: Entities must be different entities because an entity cannot make ss to itself.
[Case] Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006)
** The Full Federal Court stated that the concept of ‘supply’ in its ordinary meaning is s9-10(1) of GSTA does
seem to require some act of provision, furnishment, conferral or giving of something.
Supply of money:
Supply ≠ ss of money (unless money is provided as consideration for a ss that is a ss of money) (s9-10(4))
Example: Fred is registered for GST and owns a bookshop. He sells a book to John for $44. Sale of book
to John = ss of goods, thus subject to GST. Payment made by John/money given to Fred ≠ separate ss.
Court order and out-of-court settlements as supplies:
See pg 121
(b) Element 2: Consideration
 See slide 7
Page 36 / 61
= any payment, or any act or forbearance in connection with a ss of anything, or in response to or for the
inducement of a ss of anything (s9-15(1))
Gift, prizes and grants
Gift ≠ consideration ≠ GST. A gift arises where something is transferred voluntarily without any material
benefit to the donor. (FCT v McPhail (1968))
Prize may constitute consideration for a ss (GST Ruling GSTR 2002/3).
Example: Bill owns a horse and enters it in a race. Cash prize received due to horse winning the race =
consideration for ss.
Grant = consideration for ss where it is made on the condition that the grantee must do something in return
for receiving the grant. In contrast, grant ‘without any strings attached’ = gift ≠ GST
Example: Frank, a scientist receive grant from govt. Grant require Frank to publish results of his research
to the public. Grant = consideration for ss of research or ss of the publication of the results.
Deposits
Deposit held as security for performance of an obligation ≠ consideration for ss unless forfeited or applied
as consideration for a ss.
Taxes, fees and charges
≠ Consideration, unless it is prescribed by regulation. Ex of fees and charges prescribed by regulations:
- Parking fee of motor vehicle in a ticketed or metered parking area.
- Toll fee
- Entry, hire and usage fee to a facility, except for entry fee to national park
- Fee for use of a waste disposal facility
- Fee for provision of info if info not required to be provided under an Australian law.
See example on pg 123
(c) Element 3: Enterprise
 See slide 8
+ see week 4 (Identify a Business)
(d) Element 4: Connected with Australia
 See slide 9
(e) Element 5: Registration
 See slide 10-11
(see pg 37/8 of notes)
Mixed supplies
When ss is partly a taxable ss and partly a GST-free or input taxed ss, the taxable ss = proportion of value of
actual ss that the taxable ss represent (s9-80)
Special rule for supplies that are fringe benefits
It is limited to the recipient’s payment or recipient’s contribution towards receiving the benefit.
Example: Employer provides an employee with a plasma TV at a price of $5500, as fringe benefit.
Employee contributed $1100 for the benefit. The price of taxable ss = $1100 (not $5500) and the
employer is therefore required to pay $100 GST ( =1/11th x $1100)
7.7 GST-FREE AND INPUT TAX SUPPLIES (pg 126-130)
3 reasons for treating certain supplies have been classified as GST-free or input taxed:
(1) Consistency
To maintain consistency with approaches adopted in overseas jurisdictions. Aussie’s exports =
GST-free, as it ensures that Aussie exporters are not disadvantaged when competing in the
Page 37 / 61
international mkt.
(2) Public policy
Eg: medical ss such as consultation with a doctor = GST-free, to ensure health care cost are kept low.
(3) Political compromise
… see pg 126
GST-free supplies (pg 127/8 or Slide12/3)
Registered entities CANNOT charge GST on GST-free supplies, but are entitled to input taxed credits on
their acquisitions relating to making such ss. Examples of GST-free supplies:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Food – ss of food (s38-2) and related packaging (s38-6) under Subdiv 38-A, unless excluded by s38-3
(eg: restaurant food, take-away good, other mentioned in Schedule 1 GSTA like confectionery,
bakery products). Beverages are only GST-free if fall within Schedule 2 GSTA (eg: milk products, tea,
coffee, alcohol and certain fruit juice) - Subdiv 38-A
Health – Subdiv 38-B
Education – Education course as per definition in s195-1, eg: pre-school course, primary, secondary
and tertiary course, and an English language course for overseas students. Also covers ‘professional
or trade course’. - Subdiv 38-C
Child care - Subdiv 38-D
Exports – To ensure local products remain competitive in international market - Subdiv 38-E
Religious services - Subdiv 38-F
Charities – Certain ss by charities, gift-deductible entities and govt schools - Subdiv 38-G
Water, sewage and drainage – However, ss of water ≠ GST –free if supplies in a container or
transferred into a container that has a capacity < 100 Litres - Subdiv 38-I
Going concerns – ss of going concerns (eg: sales of business) = GST-free, provided certain conditions
are satisfied - Subdiv 38-J
Transport – ss of passenger transport on international & domestic flights +sea voyages - Subdiv 38-K
Precious metals – ss of eg: gold, silver and platinum by refiners to dealers - Subdiv 38-L
Duty-free – ss of ‘airport shop goods’ - Subdiv 38-M
Government land grants - Subdiv 38-N
Farm land - Subdiv 38-O
Cars for disabled - Subdiv 38-P
International mail – ss of service to foreign postal administrators for delivery in, or transit through
Aussie - Subdiv 38-Q
Global roaming – Certain telecommunication ss relating to global roaming arrangement in Aussie Subdiv 38-R
Input taxed supplies (pg 129/slide14)
Registered entities CANNOT charge GST on input taxed ss and are NOT entitled to input taxed credits.
Those entities benefit from the ability to sell goods and services without having to include GST in price.
Since, they do not benefit from input tax credit; they are in same position as end-consumers. Examples of
Input taxed supplies:
• Financial Supplies – eg: loans, shares, dealings in money - Subdiv 40-A
• Lease of residential premises – However, does not apply to ss by way of lease, hire or licence of
commercial residential premises (eg: hotel, motel, inn, caravan park or camping ground). Residential
premises = land or building that is occupied or intended to be occupied as a residence or for
residential accommodation (s195-1). - Subdiv 40-B
• Sales and long-term leases of residential premises – i.e leased ≥ (at least) 50 years. They are input
taxed only to the extent that property is residential premises, used predominantly for residential
accommodation. However, does not apply to commercial residential premises. - Subdiv 40-C
• Precious metals – eg: gold, silver and platinum - Subdiv 40-D
• Tuckshops – ss of food by a non-profit body through a tuckshop on school grounds provided it
Page 38 / 61
•
chooses to have all its ss of food through shop treated as input taxed. - Subdiv 40-E
Fund-raising – in connection with certain events conducted by charities, gift deductible entities and
govt schools. - Subdiv 40-F
If ss falls within both GST-free and input-taxed categories, it is usually treated as GST-free ss (s9-30(2))
7.8 CREDITABLE ACQUISITIONS (pg 129-132/slides15-22)
 See slide 17
A registered entity is entitled to a refund on the GST paid on its ‘creditable acquisitions’. A ‘creditable
acquisition’ = acquisition of goods and services inter alia for a ‘creditable purpose’
The input tax credit is designed to ‘neutralise’ the impact of GST on business to business transactions.
According to s11-5 GSTA, an entity makes a ‘creditable acquisition’ if:
• Entity acquires anything solely or partly for a ‘creditable purpose’
• Supply of the things is a taxable ss
• Entity provides consideration for the ss
• Entity registered or required to be registered
Acquisition
Defined as: ‘any form of acquisition whatsoever’ (s 11-10(1)). Also includes the following (s11-10(2)):
• Acquisition of goods and services
• Acquisition of advice or information
• An acceptance of a grant, assignment or surrender of real property
• Acceptance of a grant, transfer, assignment or surrender of any right
• Acquisition of something the ss of which is a financial ss
• Acquisition of a right to require another person to do anything or to refrain from an act, or to
tolerate an act or situation
HOWEVER, does NOT include acquisition of money (unless money provided as consideration for ss that
is a ss of money) (s11-10(3))
Creditable purpose (pg 131/slide 18)
 See slide 18
= Acquire a thing to extent that it is in the carrying on of your enterprise (s11-15(1)). Not a creditable
purpose if acquisition relates to (i) making input taxed ss, or (ii) of private or domestic nature (s11-15(2)).
Example 1: Larry owns a sport shop and is registered for GST. He bought sport goods from manufacturer
for sale in his business for $1100 (GST Inclusive). Larry acquired the goods for a creditable purpose – for
carrying on his enterprise. He is therefore entitled to an input tax credit for the GST charged by the
manufacturer.
Example 2: Larry owns a residential apartment and engages estate agent to find tenant. Agent charges
Larry $1100 (GST Inclusive) for this service. Although agent’s services are acquired in carrying on an
enterprise, the acquisition relates to a lease of residential premises, which is an input taxed ss. Thus,
agent’s service ≠ creditable purpose and Larry is therefore NOT entitled to any input tax credit for GST
charged by agent.
Amount of input tax credit for a creditable acquisition
 See slide 19-22
Page 39 / 61
7.9 TAXABLE IMPORTATIONS AND CREDITABLE IMPORTATIONS (pg 132)
S13-15 requires entities to pay GST on their ‘taxable importations’
S15-15 allow them to claim input tax credits for their ‘creditable importations’
Taxable importations
- Arise if goods are imported and entered for home consumption.
- Not necessary that importer be registered for GST
- Not taxable to the extent that it is a ‘non-taxable importation’. The latter arise when, assuming the
importation had been a ‘supply’, it would have been ‘GST-free’ or ‘input taxed’ and if importation
falls within Part 3-2 of GSTA (s13-10)
Examples of non-taxable importations:
• Exported returned to Aussie in an unaltered condition
• Goods that benefit from particular customs concession under Customs Tariff Act 1995 – (s 42-5)
• ‘Low value goods’, i.e. goods < $1000 (if imported by post) or < $250 (if imported otherwise)
Amount of GST on taxable importations
GST on taxable importation = 10% x value of taxable importation (s13-20(1))
Value of taxable importation = customs value of imported goods + international transport & insurance
cost + customs duty payable on importations (s13-20(2))
Example:
Glen imports a pair of skis for sale in his shop. Customs value + insurance freight + custom duty = $2000.
Glen must pay GST of $200 (10% x $2000) on importation. Note that GST still payable even if Glen is not
registered for GST.
If Glen’s wife imports a dress from overseas via post for $200, no need to pay GST on importation since it
falls under ‘low value goods exemption’.
Creditable importations
……..
Input tax credit for creditable importation = Full input tax credit x Extent of creditable purpose
………..
 See page 132-133 for ref (not in the slides)
7.10
ACCOUNTING FOR GST AND INPUT TAX CREDITS (pg 133/slide32)
Cash or Accrual (pg 134)
Method depends on ‘GST turnover’
Cash basis of accounting applies ONLY to ‘small business entities’ (s29-45) and entities with ‘GST turnovers’
≤ $2m - ‘cash accounting turnover threshold’(s 29-40). Entities attribute GST and input tax credits to the
extent that consideration is received or paid during a particular ‘tax period’ (s29-5(2), s29-10(2)).
Accrual basis entities attribute GST and input tax credit to period in which any consideration for ss is
received, or an invoice is issued (s29-5(1), s29-10(1))
Example 1:
A retailer with GST turnover of $1m (< $2m threshold) would ordinarily use cash basis. Different scenarios:
1) If tax invoice of goods costing $1,100 supplied to a customer is issued in tax period1 and customer
actually paid for it in that period, supplier would only need to remit GST in respect to ss in tax period 1.
2) If customer only paid the goods in tax period 3, the $100 GST is payable in respect of tax period 3.
3) If customer paid only ½ of price in tax period 3, then only (½ x $100) $50 of GST would be payable in tax
period 3 and balance of GST (remaining $50) is payable in period the remaining $50 is received.
Page 40 / 61
Example 2:
A large retailer with GST turnover of $100m (> $2m threshold) would ordinarily use accrual basis of
accounting.
If in tax period 1, a tax invoice of $1100 is issued, the retailer would be required to pay GST $100 in relation
to that period, i.e. tax period 1. This is the case even though customer might only pay the goods in period 3.
Deposits (pg 135/slide 39)
A deposit held as security for performance of an obligation ≠ consideration for ss unless
- It is forfeited/given up
- Applied as consideration for a ss (s99-5).
[Case] FCT v Reliance Carpet Co Pty Ltd
Example 1:
A pays $55 deposit to B for purchase of new computer costing $2200 (GST Incl.) in tax period 1. As per
contract, A must pay balance of price owing in tax period 2. If A fails to complete contract by due date and
deposit is forfeited, the GST $5 (1/11 x $55) is attributable to tax period 2 rather than 1 as would ordinarily
be the case under s29-5
7.11
•
INCREASING AND DECREASING ADJUSTMENTS (pg 135/slide30)
 See slide 30
Adjustments are attributable to the period in which the entity becomes aware of the adjustment
and where the ‘adjustment event’ occurs.
Examples:
Adjustment event: T co, a furniture retailer, is registered for GST. In period 1, T sold table costing $2,200
(GST $200 Incl.) to customer. In period 2, customer complained about table being faulty and T provided the
client with 50% refund. T is entitled to a decreasing adjustment of $100 (50% x $200) for tax period 2.
Bad debt: X is a large electrical goods wholesaler that account GST on accrual basis. In period 1, it supplied
goods to an electrician for $1,100. X is thus liable for $100 GST in period 1. The electrician did not pay the
goods invoiced. If in period 4, X write off the $1,100 debt as bad debt, it is entitled to a decreasing
adjustment of $100 for that tax period 4.
Change in creditable purpose: Fred, a lawyer, is registered for GST. On 5 Dec 08, he bought computer for
$4,400 (GST Incl.). Fred intended to use PC solely for business purposes and claimed input tax credit of $400
in tax period ending 30 Dec 08. As GST Incl. value < $5,000, there are 2 adjustment periods relating to
acquisition: adj period 1 (ending 30 June 10) and adj period 2 (ending 30 June 11). If at end of adj period 1,
Fred determined that he actually used PC only 60% for business and 40% for private purposes, he is liable
for an increasing adj of $160 (40% x $400) for period ending 30 June 10 (i.e. you need to pay 40% of GST
amount, while 60% is for creditable purpose, thus 60% is allowed for input tax credit)
7.12
REPORTING AND PAYMENT REQUIREMENTS (pg 136)
See monthly tax periods and quarterly tax periods on pg 137-138
7.13
TAX INVOICES AND ADJUSTMENT NOTES (pg 138/ slide 34-37)
 See slide 35-37
Invoice = document notifying an obligation to make a payment (s195-1)
These documents must be held for a period of 5 years after completion of transactions (s 382-5)
Page 41 / 61
Tax invoice need not be issued where value of ss <$75, and that of adj. notes, value <$50
Requirements of a tax invoice
•
•
•
•
•
 See slide 36/pg138
Supplier’s identity/address and ABN
Description of ss, including date, quantity and price.
Extent to which each ss is a taxable ss
Amount of GST payable
Clearly ascertainable that document was intended to be tax invoice.
Adjustment notes
S 29-75(1) states that an adjustment note:
• Must be issued by supplier
• Must set out ABN of entity that issues it
• Must contain other information set out in GST ruling GSTR 2000/1
• Must be in the approved form
7.14
•
•
•
•
•
•
•
•
•
GST TURNOVER (pg 140)
Tax period turnover threshold = $20m
Tax period turnover threshold ≥ $20m = Monthly
Tax period turnover threshold < $20m = Monthly OR Quarterly
Registration turnover threshold = $75,000
Cash accounting/ small enterprise turnover threshold = $2m
Electronic lodgment turnover threshold = $20m
Installment turnover threshold = $20m
Tax Invoice threshold = $75
Adjustment Note threshold = $50
Values of the following supplies are expressly ignored:
• Input taxed ss
• Ss that are not for consideration
• Ss not made in connection with an enterprise carried on by the entity
7.15
7.16
7.17
GOING CONCERNS (pg 141/slide13)
FINANCIAL SUPPLES (pg 142)
SALES AND LONG-TERM LEASES OF RESIDENTIAL PREMISES (pg 146)
7.18
MARGIN SCHEME (pg 149/ slides 40-41)
 See slide 40-41
Eligibility to use the margin scheme
To be able to use the margin scheme, the supplier and the recipient must agree in writing, on or before
making the ss, which the margin scheme is to apply
GST payable is 1/11th x “margin” for the supply
Margin Scheme is commonly used when developers sell residential land to unregistered purchasers.
NET AMOUNT OF GST = (GST - INPUT TAX CREDIT) + (INCREASING Adj - DECREASING Adj)
Page 42 / 61
WEEK 7
Chapter 23 – FRINGE BENEFITS TAX (pg 493-515 + 529-26 + 236)
Fringe benefits tax (FBT) = separate federal tax imposed on employers (Not employees) in respect of “fringe
benefits” which are provided to their employees in respect of employment. FBT catch PRIVATE components.
FBT = FBT amount for the year of tax X 46.5%
There are essentially 3 steps involved in dealing with FBT:
(1) Identify whether a fringe benefit exists
(2) Determine its taxable value
(3) Calculate FBT
23.2
a.
b.
c.
d.
e.
f.
g.
h.
i.
FEATURES OF FBT (pg 494)
Imposed on employers.
“FBT rate of 46.5%” on “fringe benefits taxable amount” for a “year of tax” (1 April to 31 March)
(s66 FBTAA) [46.5% = top marginal income tax (45%) + Medicare levy (1.5%)].
FBT is available as a tax deduction to the employer.
Not assessable unless it is cash or capable of being converted into cash (s6-5)
There are 2 FBT gross-up rates for FBT years commencing ≥1 April 2000 to ensure neutrality of
treatment following the introduction of GST on 1 July 2000
The tax-exempt entities receive a rebate under s65J FBTAA.
The FBT is an annual tax which is paid in quarterly installments.
Even though employees don’t pay FBT, they need to record that on their PAYG summaries.
Must report FBT where taxable value <$2000 from 1 April 2007  slide 15
23.3
FRINGE BENEFITS (pg 496)
- Defined in s136(1) FBTAA and contains both positive and negative limbs.
Positive limbs
FB arises where:
(a) Benefit provided during tax year
(b) By an employer
(c) To employee (past/future/present employee)
(d) In respect of employment of the employee
MUST have employer-employee relationship, i.e. father who employs daughter in his business ≠ FBT
if provide daughter with birthday gift as gift not connected with employment.
 See slide 5-6
Negative limbs
FB excludes:
(a) Salary and wages - Because it is assessed on employees under general Y tax rule.
(b) Exempt benefits (e.g.: certain car, loan, expense payment, property and residual benefits. Also
includes: minor benefits with taxable value <$300, taxi travel to and from workplace, remote area
housing benefits, portable electronic devices, computer software or tools for trade that are
primarily used in employee’s employment)
Certain work-related items in s58X or slide 12/pg498
(c) Other benefits (employee share scheme, deemed dividends, ETP, superannuation
benefits/contributions)
Page 43 / 61
13 categories of ‘benefits’ that FBTAA recognizes:
• Car benefits (s7)
• Housing benefits (s25)
•
Living-away-from-home
•
allowance benefits (s30)
Expense payment benefit • Airline transport benefits •
(s20)
(s32)
Loan benefits (s16)
• Board benefits (s35)
Residual fringe benefits • Property benefits (s40)
(s45)
Debt waiver benefits (s14)
•
•
•
23.4
•
•
•
•
•
Meal entertainment benefits
(s37AC)
Tax-exempt body
entertainment benefits (s38)
Car Parking benefits (s39A)
CALCULATING TAXABLE VALUES OF FB (pg 499)
Each of the 13 different categories above has its own valuation rules.
Relies on cost price, market values, statutory formulas, benchmark interest rates and other
objective criteria to calculate taxable values
Sometimes, value = cost to employer.
In-house and external benefits
Ex of in-house benefit: provision of floor stock by furniture retailer to employees
Ex of external benefits: other kind of benefits like plasma TV by a law firm to employee.
General  more concessional taxation treatment on in-house benefits than external
Unreimbursed recipient’s contribution (pg 500)
Otherwise deductible rule (pg 500/slide 14)
- Are designed to prevent double taxation by reducing taxable value of FB to extent that employee
has ‘lost’ a deduction because they are provided with the FB instead of incurring expense
themselves.
- ONLY applies to: (1) Loan, (2) Expense repayment, (3) Airline transport, (4) Board, property and (5)
Residual FB
- It is a ‘once-only’ deduction, i.e. wholly allowable in a single Y year.
- Read more pg 500/1
Reduction amount
- Provide concessional tax treatment
- S62 = 1st $1000 of the aggregate of any ‘in-house FB’ and ‘airline transport FB’ is NOT subject to FBT
- See other FBTAA containing reduction amount pg 502
- Reduction amount ≠ Exempt benefits
Exempt employers (slide13)
- Religious institutions – s57
- International bodies – s55
- Foreign government representatives –s56
- Public benevolent institution – s57A
- See Miscellaneous exempt benefits
- See Div 13 & 144
23.5
FRINGE BENEFITS TAXABLE AMOUNT (pg 502)
An employer’s FBT liability is calculated as follows:
FBT = Fringe benefits taxable amount × FBT rate (46.5%)
Page 44 / 61
Type 1 and Type 2 FB
1st stage – calculate the “taxable value” of each fringe benefit
2nd stage – Classify the FB as either type 1 (include GST) or type 2 (exclude GST/ GST free) [Depend on prepost-GST]
3rd stage – aggregate/gross up the value of type 1 (by 2.0647 – value is higher to incorporate GST) and type
2 (by 1.8692 – without GST) FB amounts
The reason why it is grossed-up = To ensure that it has an equivalent value to salary earned by
an employee subject to top marginal Y tax rate + Medicare levy. The gross-up is designed to
neutralize the distinction between receiving FB instead of salary.
th
4 stage – Aggregate non-exempt amount
5th stage - Multiply by 46.5%
Type 1 Benefits (post-GST):
Used where employer is entitled to GST input tax credits + see slide 20
Type 1 aggregate FB amount =
(FBT rate + GST rate)
(1-FBT rate) x (1 + GST rate) x (FBT rate)
Type 2 Benefits (pre-GST):
Used where employer is NOT entitled to GST input tax credits + see slide 21
Type 2 aggregate FB amount =
1
(1-FBT rate)
Example:
During the year ended 31 March 2006, Melrose Plastics Ltd. provides its employee, Heather, with a fringe
benefit of $5,000 (GST inclusive), thus,
Step 1 = Fringe Benefit Amount = $5,500
Step 2 = Benefit type 1 since it is GST inclusive
Step 3 = Gross up FBT. Fringe Benefit Taxable Value = ($5,500 x 2.0647) = $11,356
Step 4 = FBT Payable by Melrose Ltd = ($10,323.5 x 46.5%) = $5,280
Thus, Melrose:
Receives a tax deduction for the benefit = $ 5,000
Receives a tax deduction for the FBT = $ 5,280
Total tax deductible to Melrose Plastics Ltd = ($5,000 + $5,280) = $10,280
Aggregate non-exempt amount
S5B(1D)  FB taxable amount is increased by employer’s ‘aggregate non-exempt amount’ if the benefit
provided are exempt benefits under s57A FBTAA.
S57A  benefits provided to employing of qualifying public/non-profit hospitals, public ambulance service
providers, health promotion charities and public benevolent bodies = treated as exempt benefits.
Aggregate non-exempt amount = sum of grossed-up taxable values that exceed:
• $17,000 (relating to public/non-profit hospital or public ambulance services)
• $30,000 (relating to duties connected with health promotion charities and public benevolent that
are not covered by the $17,000 threshold)
• FBT payable on the excess
FB taxable amount = (Type 1 Agg FB x 2.0647) + (Type 2 Agg FB x 1.8692) + Agg non-exempt amount
Example: pg 505
Page 45 / 61
23.6
CHART OF THE STEPS INVOLVED IN CALCULATING FBT (pg 506)
Specific Fringe Benefits
23.7
CAR FRINGE BENEFITS (pg 507/slide22)
According to s7(1) and s136(1), a “car benefit” arises on any day, if:
• Is a car
• In respect of employment
• Is “held” by an employer (or associate or third party arranger), and
• Is applied to or available for the private use of an employee /associate.
S136(1) “Private use” = any use which is not exclusively in the course of producing assessable Y, and would
generally include travel between home and work. There is a deemed private use where car:
• is kept or garaged at/near the place of employee’s place of residence (s7(2))
• is NOT at the business premises (s136(1)) of employer, and
(i) Employee/associate is entitled to apply the car to a private use and/or
(ii) Employee has custody or control of the car while not performing their duties or employment
(s7(3))
• This rule is NOT applicable to marked ambulance, firefighting/police cards fitted with flashing
warning lights and alarms (s 72(2A)).
Exception: s7  Car = exempt benefit if:
• Car = taxi, panel van/utility truck, designed to carry a load of < 1tonne or <9 passengers (exclude
motorcycles) and there was no private use of the car than work-related travel of employee or other
minor private use by employee (s 8(2)).
• Car = unregistered and was wholly/principally used directly in connection with business operation
of employer (s 8(3))
Calculating taxable value of a car fringe benefit
There are 2 methods which are:
(1) The statutory formula (s9) – (Slides 24-28)
• Applies automatically unless employer elects to use the Operating Cost Method.
• Applicable for FBT years beginning ≥ 1 April 2011.
TaxableValue =
ABC
−E
D
Where:
A = Base value of car (includes delivery costs, registration and stamp duty plus non-business accessories
(see definition in s136 (1)) e.g. air-conditioning, tape player, etc.
B = Statutory fraction based on the “ANNUALISED” number of whole kilometres travelled in the year
C = Number of days where benefits were provided during the year
D = Number of days in tax year (i.e. 365 or 366 days)
E = Any unreimbursed payments made by the recipient to the provider for use of the car (includes
unreimbursed expenses such as fuel, oil, registration, insurance, repairs etc)
NOTE: requires documentary evidence or declaration for fuel and oil
 See more details pg508/9
Page 46 / 61
Example: slide 27-28
Annualised km statutory fractions for FBT are:
Annualised
kilometres
BEFORE
10/05/11
0 to 14,999
15,000 to 24,999
25,000 to 40,000
over 40,000
0.26
0.20
0.11
0.07
Statutory fraction
New Contracts entered into after 10/05/11 after 7.30pm
From 10/05/11
From
From 01/04/13 From 01/04/14
01//04/12
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.14
0.17
0.2
0.2
0.1
0.13
0.17
0.2
(2) The operating cost basis method (s10) – (pg509 + slide 29-33)
Taxable Value = (C x (100% - BP)) – R
Where:
C = Operating cost of the car (whether incurred by the employer or employee). It includes:
– Repairs, maintenance, fuel, registration and insurance
– Deemed depreciation (rate of 25% for acquired ≥ 10/05/06) – pg510
– Deemed interest (2011/12 statutory interest rate = 7.80%) – pg510
– Lease charges if car is leased.
BP = Business Percentage - % of business use of the car  based on log book records for a continuous 12
week period. It is deemed NIL if log book and odometer records are not maintained.
R = Recipients payments
NOTE: Distinguish between Purchased and Leased asset.
Example: slide 31-32 + pg 510
23.8
DEBT WAIVER FRINGE BENEFITS (pg 510/slide38)
• Arises where a provider/employer waives the obligation of the recipient/employee to pay or repay a
debt (s14; s136(1)).
• The taxable value of a debt waiver FB = amount of the payment or repayment of which is waived (s15)
 TV = The amount of the debt waived – s15
23.9
LOAN FRINGE BENEFITS (pg 511/slide34/7)
• Arises where a “provider” makes a loan to a “recipient” (16(1), s136(1)) .
• Deemed to arise where an amount that a person is under an obligation to pay, is not paid on the date
(s16(2))
Loan benefit = ‘exempt benefit’ where:
• Making loan = carrying on a business and interest rate charged ≥ rate charged on similar arm’s length
loans made in the ordinary course of business to members of the public.
• Employer makes loans to current employee for SOLE purpose of enabling employee meet expenses
incurred in performing duties within 6months of making loan. (Loan must NOT exceed expected
expenses and employee must a/c for expense within 6 months and repay amount not accounted for).
• Loan made enabling employee to pay rental bond, security deposit in respect of electricity, gas or
Page 47 / 61
telephone. Loan is required to be repaid within 12 months.
Calculating the taxable value of a loan fringe benefit
Taxable value of a loan FB = amount (if any) by which the ‘notional amount of interest’ in relation to the
loan in respect of the year of tax exceeds the ‘actual amount of interest’ that has accrued on the loan in
respect of the year of tax” (s18).
TV = (Statutory Interest Rate - Actual Interest Rate accruing on the loan)
Statutory interest rate for FBT year 2011/12 = 7.80%
Special rules apply to loans:
• Fixed interest loans made < 1 July 86  notional interest rate = lower of (a) statutory interest rate at
time loan is provided and (b) statutory interest rate for year of tax.
• Variable interest housing loans made < 3 April 1986  notional interest rate = lower of (a) statutory
rate for year of tax, and (b) 13.5%.
TV = Notional interest – Actual interest
Example: slide 35-37 + pg 513
23.10
EXPENSE PAYMENT FRINGE BENEFITS (pg 513/slide39-42)
 See slide 39
TV = The amount paid or reimbursed by the employer (s23).
TV depends on whether it is classified as ‘in-house’ or ‘external’ FB
In-house FB:
2 kinds:
(1) In-house property expense payment FB –where expense relates to acquisition of property provided
by employer in the ordinary course of business.
(2) In-house residual expense payment FB – where expense relates to acquisition of other benefits
provided by employer in ordinary course of business.
All other are external FB (s136)
Tax Value of benefit may be reduced by:
• Employee contributions
• Otherwise deductible rule
Example: slide 40/2 + pg 515
23.19
RESIDUAL FRINGE BENEFITS (pg 529-5/slide39-42)
 See slide 43
Residual benefits = exempt benefits under s47 if:
 Transport (other than aircraft) to current employee btw residence and workplace by employer
carrying on a transport business to public (s47(1))
 Transport to police officer btw residence and primary place of employment (s47(1A))
 Recreational and child care facilities located on business premises of employer or related co (s47(2))
 Use of property (other than motor vehicle) located on business premises and used in connection
Page 48 / 61





with business operation (s47(3))
Provision of accommodation to employee required to live away from home in order to perform
employment duties... (pg530) (s47(5))
Motor vehicle, that is not car or any other road vehicle designed to carry load < 1tonne where the
only private use of vehicle is for work-related travel or other minor infrequent use (s47(6))
Provision of motor vehicle to employee that was unregistered throughout the FBT year and that was
wholly/principally used directly in connection with business operations (s47(6A))
Transport btw usual place of employment and usual place of residence, where place of employment
is on an oil rig at sea or in a remote area (s47(7))
Provision of contribution made under program administered by Families Department to obtain
priority access to certain child minding facilities for children of employee (s47(8))
TV = Depends on whether the benefit is “in-house” or “external”  see pg 531-532 for each of the foll. FB:
• In house non period residual fringe benefit (s48)
• In house period residual fringe benefit (s49)
• External non period residual fringe benefits (s50)
• External period residual fringe benefits (s51)
23.19
NON-CASH BUSINESS BENEFITS (slide44/6)
 See slide 44-46
Under s21A ITAA36, a non-cash business benefit that is not convertible into cash is to be treated as if it is
convertible to cash. Where s21A applies, the benefit is brought to account at an arm’s length value
(s21A(5)).
For s21A to apply:
(1) there must be a “non-cash business benefit” as defined in s21A(1)
(2) that benefit must constitute Y derived by the taxpayer from the carrying on of a business for the
purpose of gaining assessable Y
(3) the total assessable value of all non-cash business benefits received by the taxpayer during the
income year must > $300 (s23L(2) ITAA36)
(4) The recipient of the benefit would have been able to a deduction for the benefit, if the recipient
had incurred the cost, then the amount is not assessable (ie. Otherwise Deductible Rule)
(5) The cost of benefit is not deductible to the person who provides the benefit. An example would be
expenditure incurred in providing a benefit in the form of entertainment.
[Case] Cooke and Sherden v FCT – non-cash business
Home delivery drink retailer were provided with overseas holidays under a sales incentive scheme run by
their supplier. The holidays were non-transferable. **It was held no to be convertible into a monetary from,
which is non-cash business.
Page 49 / 61
WEEK 8
Chapter 14 – General Deductions
S8-1 -general deduction test has 2 positive and 4 negative limbs.
The positive limbs (s8-1(1)) state: “You can deduct … any loss or outgoing to the extent that:
(a) It is incurred gaining or producing your assessable income; or
(b) It is necessarily incurred in carrying on a business (2nd Limb) for the purpose of gaining or
producing your assessable income (1st Limb).” (slide 3)
The negative limbs (s8-1(2)) state: “However, you CANNOT deduct a loss or outgoing to the extent that:
(a) It is a loss or outgoing of capital, or of a capital nature; or
(b) It is a loss or outgoing of a private or domestic nature; or
(c) It is incurred in relation to gaining or producing your exempt income or your non-assessable
non-exempt income; or
(d) A provision of this Act prevents you from deducting it (statutory prohibition).” (slide 4)
2 step process involved in dealing with the provision
Step 1  Determine extent that loss/outgoing falls within either of the 2 +ve limbs
Step 2  Determine extent that the loss/outgoing is excluded under any of the 4 –ve limbs
NOTE: Proceed to step 2 only if step 1 has been satisfied.
14.3
POSITIVE LIMBS (pg280)
Establishing a ‘nexus’ between loss or outgoing and the positive limbs
• Need sufficient connection/nexus/link between loss/outgoing and the production of assessable income
(1st limb) OR the carrying on of taxpayer’s business (2nd limb).
• Court does not require loss to match with specific production of a specific amount of Y. Not necessary
that expense actually produce Y in that year. (FC of T v Smith AND Fletcher & Ors v FC of T)
1st Positive Limb:
Pragmatic and commercial approach to determining nexus (slide9)
[Case] W Nevill & Co Ltd v FC of T (pg281) – allowed deduction
Court allowed co. deduction for amount paid to it MD in consideration for him agreeing to resign. This is
because, the court held that even though payment did not produce any Y, they were made ‘for the purpose
of increasing efficiency of the co. and therefore, increasing Y producing capacity.
[Case] Herald and Weekly Times Ltd v FC of T (pg 281) – allowed deduction
The ‘in the course of’ and ‘incidental and relevant’ tests (slide9)
The loss or outgoing is required:
(1) To be “incidental and relevant” to the taxpayer’s income-producing/business operations, and
(2) To have the “essential character” of an income-producing/business expense.
“In the course of”  [Case] Amalgamated Zinc (De Bavay’s ) Ltd v FCT – Not deductible
Taxpayer, a mining company, had ceased business and carried on an investment business. But under a
compensation scheme, it was required by law to pay contribution to a fund for the benefit of former mine
workers suffering from work related illness. **The Court held that a deduction was not allowable as the
expenses had no connection with the derivation of income by the taxpayer in the Y years in question.
“Incidental and relevant”  [Case] W Neill & Co Ltd v FCT – Deductible (expense incurred to ↓future exp)
(See above)**The Court concluded that the expense would save future expenses, would increase the
Page 50 / 61
efficiency and improves the operations of the business. The expense was not a usual one but is said to be
related to ongoing business processes. Therefore, it is not a capital outlay, and thus is deductible.
The ‘character’ tests (pg283/slide9)
[Case] Charles Moore & Co (WA) Pty Ltd v FCT – Deductible (theft losses and defalcations)
The taxpayer claimed a deduction in respect of trading receipts which were robbed while being taken to the
bank. **The Court held that the loss there as “incidental and relevant” to the taxpayer’s income-earning
activities. Thus, the relevant loss was deductible.
[Case] Lunney and Hayley v FC of T – NOT deductible
The case demonstrates that the mere fact that an outgoing is a prerequisite to earning Y is NOT sufficient,
by itself, to render the outgoing deductible. It depends largely on its’ essential character’
Eg of the case: ** HC denied certain taxpayers deduction for cost of travel btw home and work on the basis
that the expenditure could NOT be characterized as a working or business expense (pg283)
[Case] FC of T v Cooper – NOT deductible
Taxpayer, a professional rugby player, was instructed by coach to increase his normal food and drink intake.
** The Full Federal Court denied him deduction on his additional food and drink costs because purpose of
increasing his weight does not relate to his profession and his earning capacity. But since Additional
food/drink is neither relevant nor incidental to his training and playing of football matches. His Y-producing
activities do not included consumption of food/drink.
There are two approaches in characterising outgoings:
(1) Objective/Legal purpose – By looking at facts
(2) Subjective purpose
(1)
Characterizing outgoings by reference to objective purpose (facts)/ Legal rights (slide10)
[Case] Cecil Bros Pty Ltd v FCT (pg285) – deductible
The taxpayer purchased trading stock from a related company at a price greater than the price it would have
paid directly from the suppliers. The apparent object of the transaction was to reduce the taxpayer’s taxable
income and to increase the taxable income of the supplier. The court held that the general anti-avoidance
provision could not be used to annihilate/eradicate a deduction where the only legal effect of the expense
was to acquire trading stock, thus it is necessary expenses, which is deductible. “…It is not for the
court/commissioner to say how much a taxpayer ought to spend in obtaining his income.”
[Case] FC of T v Phillips (pg285)-Same as Cecil Bros Case, except it concerns professional service– deductible
In both cases, the court did not focus on aspect of arrangement to characterize outgoings. Instead, they
focused on what outgoings have objectively obtained – i.e. trading stock, secretarial and clerical services,
and use of equipment.
(2)
Characterizing outgoings by reference to taxpayer’s subjective purpose (pg286/slide11)
- Where expenditure is voluntary
[Case] Magna Alloys & Research Pty Ltd v FC of T (Deductible)
The case concerns legal expense incurred to defend criminal proceedings against directors. ** The Court
said that it was something that was actually going to affect the reputation of the business and it potential
future Y. Thus, since there is a connection with its future Y producing aspect, it is deductible.(See pg 286)
[Case] Ure v FC of T – Income-splitting family loan (NOT deductible) - pg 287
The taxpayer borrowed funds at commercial interest rate of 12.50% and on lend the funds to his wife and a
family co. at an interest rate of 1%. The purpose of the arrangement was to provide the taxpayer with losses
that could be deducted from his employment income, thus creating a negative gearing arrangement, and
providing the taxpayer with a home for nominal rent. **The court held that the taxpayer’s interest
expenditure was only partly deductible. The expenses incurred in benefiting the taxpayer and his family
through the trust was not deductible because they were of a private nature.
[Case] Fletcher & Ors v FC of T – Timing mismatches (NOT deductible)
The taxpayers were carrying on a business of land subdivision. They entered a complex scheme which
Page 51 / 61
involved partnership, annuity and loan arrangement. The main feature of the scheme was that a taxpayer
was able to terminate the arrangement after significant deductions had been obtained under the scheme.
Issue: Is the taxpayers were entitled to a deduction for interest? **The Court stated that if taxpayer’s costs
in deriving income < actual income, deductions is allowed. However, if costs > income derived, the
taxpayer’s purpose for making the expenditure may be relevant in characterising and apportioning the
expenditure for the purposes of the general deduction provision. The rule is not affected by the taxpayer
having a choice between incurring expenditure that is deductible or not deductible.
Characterizing outgoings where related party transaction are involved
 See pg 289
Nexus between loss/outgoing and taxpayer’s assessable Income (slide 12)
A loss is deductible ONLY to the extent that the loss relates to gaining TAXPAYER’s assessable income. Thus,
an outgoing by 1 taxpayer to make Y for another taxpayer ≠ deductible as nexus requirement NOT satisfied.
[Case] FC of T v Total Holdings (Australia) Pty Ltd (pg291)
Court takes a broader view of the nexus requirement between parent co. and wholly-owned subsidiaries. A
parent co. was allowed deductions for interest incurred on money borrowed and on-lent interest free to its
subsidiaries. ** The FFC held that the fact that parent received no interest Y from loan made to subsidiary
did not prevent parent co. from being able to claim deductions for its interest expenses.
[Case] FC of T v Munro (slide 12)
2nd Positive Limb: - Timing is important here
Necessarily incurred in carrying on a business (slide 13/pg291)
[Case] FC of T v Snowden & Willson Pty Ltd – deductible
Taxpayer’s business = speculative house-building. Attacks on the company in parliament + accusations of
dishonest business practices resulted in the Royal Commission to inquire the co’s activities. The taxpayer
incurred expenses for public advertising to counter the allegations made and for legal representation before
the Royal Commission. **The Court held that the business could do nothing else but protects itself against
allegations. The expenses were therefore necessarily incurred in carrying on the business.
[Case] Magna Alloys & Research Pty Ltd v FC of T (deductible)  Legal expenses incurred to defend criminal
proceedings against directors. ** The Court said that it was something that was actually going to affect the
reputation of the business and it potential future Y(see pg 292).
Losses/outgoings incurred before commencement of a business (slide 13/pg293)
“Per-commencement (Preliminary) expenditure” – not deductible
Costs incurred before the commencement of a business (e.g.: feasibility studies, tests) are not incurred “in
carrying on a business” and are not normally deductible under the general deductible provision.
[Case] Softwood Pulp and Paper Ltd v FCT – not deductible
A Canadian firm conducted investigations to determine viability of a paper mill in a particular area.
Subsequently, the taxpayer co. was incorporated in Australia to carry out further feasibility studies and to
run the paper mill, if the venture proceeds. The Canadian co. ultimately abandoned the project. Taxpayer
derived substantial Y from the project, but claimed deduction for expenditure incurred on feasibility studies
and certain follow-up expenses. **The Court held that the expenses were not incurred in the ‘carry on’ of
the business, since the business hasn’t started yet.
[Case] Griffin Coal Mining Company Ltd v FC of T – not deductible
FFC disallowed coal mining co. deductions for feasibility study exp. relating to construction of a proposed
aluminum smelter. Expenditure not related existing business, but to formation of potential new source of Y.
[Case] Goodman Fielder Wattie Ltd v FC of T – not deductible (pg293)
Losses/outgoings incurred after cessation of a business (slide 14/pg293-7)
[Case] AGC (Advances) Ltd v FC of T – deductible (not yet stop the business)
[Case] Amalgamated Zinc (De Bavay’s) Ltd v FC of T – Not deductible
Page 52 / 61
Workers compensation paid after business closure is NOT deductible as there is a break in the nexus.
[Case] Placer Pacific Management Pty Ltd v FC of T – deductible
The taxpayer had ceased his business as a conveyor of belt systems. Some 8 years later he was required to
meet a liability claim of a faulty system. At that time, the activities carried on by the taxpayer were limited
to investment and management of relate cost. Issue: is the amount payable on settlement of the claim and
are related legal fees deductible? **The court held that outgoing = deductible under 2nd limb of s 51(1).
[Case] Brown v FC of T – deductible
Brown (taxpayer) and his wife had carried on a delicatessen business in partnership. They continued to
make interest payments on a loan used to fund the purchase of the business after they had sold it. **The
court held that the interest outgoings continued to be deductible. The loan agreement created a legal
liability to pay interest over 10yr term as it provided for monthly repayments but not for early repayment.
Illegal business activities – deductible
[Case] La Rosa v FC of T
The taxpayer had been engaged in an illegal drug dealing business. The taxpayer was allowed deductions for
money that had been robbed from him during an attempted drug deal. **The Full Federal Court held that
purpose of tax laws = tax taxable Y, but ≠ punish wrongdoing. Thus, the deduction should be allowed.
(Note: Shortly after that case, s26-53 ITAA97 was introduced to expressly deny deductions for
losses/outgoings relating to commission of certain offences.)
14.4
NEGATIVE LIMBS (pg297/slide15)
Even though a loss is satisfied under the positive limbs of s8-1, it will NOT be deductible under s8-1 if it falls
within 1 of the negative limbs.
1st Limb: Capital loss and outgoing
2nd Limb: Private or domestic losses or outgoings
3rd Limb: Losses or outgoings incurred in gaining exempt income or NANEI
4th Limb: Losses or outgoings that are not deductible under the ITAA36 or ITAA97
1st Limb: Capital loss or outgoing (slide15)
This limb denies deduction to the extent it is a loss/outgoing of ‘capital or of capital nature’. Capital losses
need to be distinguished from ‘revenue’ losses.  See example of case: Application of capital limb (slide16)
Loss or Outgoing
Revenue Nature
May be deductible under s8-1 ITAA97
Capital Nature
NOT deductible under s8-1 ITAA97
3 leading judicial tests:
(1) Once and for all test
(2) Enduring Benefit test
(3) Business Entity test (previously - Fixed vs circulating capital test)
Note: These tests are only broad ‘rules of thumb’
[Case] BP Australia Ltd v FC of T:
…It has to be derived from many aspects of the whole set of circumstances some of which may point in one
direction, some in the other… It depends on what the expenditure is calculated to effect from a practical
and business point of view, rather than the juristic classification…
(1) Once and for all test: (pg298)
Expenditure that is incurred ‘regularly’ = Revenue
Expenditure that is incurred ‘once and for all’ = Capital nature
[Case] Vallambrosa Rubber Co Ltd v Farmer – Revenue/deductible
The taxpayer, owner of a rubber estate, incurred expenses in maintaining and developing its plantation.
Only 1/7 of the trees were producing rubber at that time. Revenue commissioner allowed only 1/7 of
Page 53 / 61
expenditure to be claimed as deduction, where the remaining 6/7 is of capital nature. **The Court however
rejected that statement and allowed taxpayer to deduct the entire amount of its general expenditure. The
Case failed the “Once and for all” test. Since the expenditure was incurred on items that he would have to
meet every year, the expenditure = revenue nature, and therefore deductible.
(2) Enduring Benefit test: (pg299)
An asset of lasting nature = capital nature
[Case] British Insulated & Helsby Cables v Atherton – Capital/ Not deductible
The taxpayer contributed about £31,784 to form a pension fund for its staff. This payment was held to be
capital in nature on the basis that it brought into existence an asset of “enduring benefit” - not deductible
(3) Business Entity test:
It distinguished btw losses that relate to taxpayer’s ‘profit yielding structure’ and ‘process of operating it’.
Expenditure relating to establishment, organization, enlargement, extension or protection of a business
entity = Capital in nature
Expenditure incurred in operating business = Revenue in nature.
[Case] Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T – Capital/ Not deductible
To prevent competition in the Sydney market, the taxpayer, a Sydney newspaper publisher, paid ￡86,500
(by installments) to a rival publisher in consideration on the rival selling the taxpayer’s interest in a
newspaper it was publishing and agreeing not to produce a competitive newspaper for 3 years within 300
miles of Sydney. **The HC held that the payment = capital nature as they strengthened and preserved
taxpayer’s business, which the latter feared would be impaired due to competition.
The cases consider the revenue vs capital distinction, indicated by three factors:
a) The character of the advantage sought, and in this is lasting qualities may play a part (whether the
expense yielded a lasting benefit).
b) The manner in which it is to be used, relied upon or enjoyed (whether the expenses were recurrent).
c) Whether the benefit acquired was acquired by periodic or lump sum outlays.
2nd Limb: Private or Domestic loss or outgoing (slide18)
This limb denies deduction to the extent it is a loss/outgoing of ‘private (personal) or of domestic
(household affairs) nature’.
[Case] Lunney and Hayley v FCT (pg283)  For a loss to be deductible, it depends of its ‘essential character’
[Case] FCT v Janmoor Nominees Pty Ltd (pg290)
• Clothing (pg302):
[Case] Mansfield v FCT (general rule) – deductible
The taxpayer, a flight attendant, received reward from her employer which could be used for special
clothing (cosmetics, hairdressing, shoes, etc…) in her employment. Taxpayer spent money on these items
and sought deduction on these. **The Courts allowed deductions for clothing where it is required to have
special features or where harsh working conditions result in frequent damage. The shoes, too large to be
worn outside of work, may be treated as business apparel, and thus part of uniform.
[Case] Edwards v FCT (Exceptions) – deductible (cannot use in ordinary life)
The taxpayer was the personal secretary to the wife of the Governor of Queensland. To carry out her duties
like attending public engagements, she often had to change clothes several times a day, sometimes moving
from less formal daytime clothing to formal evening wear. She would not normally wears these unless for
her job. **The court held that some weight was given to the fact that the clothing was qualitatively
different from that what she normally wears in ordinary life.
• Travel (pg303):
For travel expense to be deductible, it must be characterized as working or business expenses.
o
Home-work travel (pg304)
Page 54 / 61
Generally NOT deductible because such cost is not incurred ‘in course of’ any Y-earning activities,
but rather in getting to the place where such activities are performed. Distinguish between
travelling “on work (deductible)” and travelling “to work (not deductible)”
[Case] Lunney v FC of T – not deductible
The taxpayer claimed deduction for cost of travelling from home to work. **The court held that the
fares were not deductible. Although they were prerequisite to the earning of the taxpayer’s income
they were not incurred in the course of gaining assessable income. Deductibility depends upon the
essential character of the expenditure.
[Case] Taylor v Provan
If the job requires a man to travel, i.e. ‘on his work’, then it is deductible.
o
Travel between 2 unrelated places of work (pg305)
Generally NOT deductible under s8-1 because it is not ordinarily incurred in course of deriving Y
from either activity
[Case] Payne v FC of T – not deductible
The taxpayer was a Qantas pilot flying out of Sydney airport who owned a deer farming property
(also his place of residence). **The Court denied a deduction for travel between the deer farm and
the airport on the basis that the expenditure was incurred in the interval between two income
earning activities and not while the taxpayer was engaged in either activity. As a result, travel
between two unrelated businesses is NOT deductible.
HOWEVER, after Payne case, s25-100 ITAA97 was introduced and allows deductions for cost of
‘travel between workplaces’. However, it is ONLY deductible if the travel is directly between 2 places
where Y-producing activities are carried out and neither place is the taxpayer’s home.
o
Travel to find new work (pg306)
Need to distinguish between expenditure incurred in travelling to get new business clients and to
get new employment.
Example: A self-employed builder who regularly goes to clients’ place to make a quote, are allowed
deduction, whereas an employee who travels to a job interview would NOT be allowed deduction
(because exp. Incurred in course of ‘getting’, rather than ‘doing’ the work).
[Case] FC of T v Maddalena – See pg 306
• Child Minding Expenses (pg307):
[Case] Lodge v FC of T – Not deductible
The taxpayer was a single parent who worked mostly from home under contract as a law clerk. To enable
her carry out the work, she placed her child in child care nursery facilities and sought deduction for the
expense on the basis that she could not have carried on the work but for expenditure. **The Court held
that the expense was not deductible because the cost is a private/domestic expense. The nursery fees were
neither relevant nor incidental to activities by which taxpayer gained her Y.
• Self Education (pg307):
Issue: Does the expense have sufficient link to the taxpayer’s Y-producing activities.
Self-education expense of revenue nature = deductible
Self-education expense of capital nature (eg: cost of new computer for study purposes) = NOT deductible
under s8-1 BUT may be deductible under capital allowance regime in Div 40.
o
Self-education expenses linked to current occupation (pg308)
Satisfies nexus requirement of +ve limbs of s8-1 where it is incurred to maintain/increase taxpayer’s
skill in his CURRENT job and where it enhances his chance of promotion/prospect of greater Y.
[Case] Finn v FC of T – deductible
A WA government-employed architect claimed deduction for overseas travel incurred to bring
himself up to date with developments in his profession. **The HC found that the tour was
incidental and relevant to his employment; as the knowledge sought improve taxpayer’s chance of
advancement in his work.
Page 55 / 61
[Case] Hatchett v FC of T – deductible (pg308)
•
o
Self-education expenses NOT linked to current occupation (pg310)
Educational expense relating to occupation that taxpayer is NOT presently engaged = NOT
deductible. For example: a medical student who is not yet practicing as doctor would usually be
denied deduction for cost of textbooks.
[Case] Roberts v FC of T – Not deductible
The taxpayer, a mining engineer, incurred cost in pursuing an overseas MBA qualification. After his
studies, he was employed by another co. at an increased salary. **The court held that the education
expense was incurred to obtain ‘new’ employment rather than ‘in course of’ his current
employment, thus NOT deductible.
o
Self-education expenses linked to other kinds of assessable Y (pg311)
Exceptions where exp. deductible even though taxpayer may not have any current employment or
business that provide necessary connection btw those expenses and the derivation of assessable Y.
[Case] Antis v FC of T – deductible
The taxpayer, a full-time student who was undertaking a teaching degree and who received
assessable ‘Youth Allowance’ payment from govt, claimed deductions on expenses (cost of
textbooks, student admin fees, & travel exp to teaching schools job). ** The FC and FFC allowed her
deductions on basis that they were a necessary incident of deriving assessable Y from the Youth
Allowance.
Home Office (pg312):
o Rent and interest expenses (pg312)
General rule: NO deduction under s8-1 for expenses like rent paid to lease homes or interest paid
on home loans. This is the case even though they might maintain a study at home in which they
work.
[Case] Handley v FCT – not deductible
The taxpayer used a room in his house to carry out activities relating to his profession as a barrister.
The room was used predominantly (approx 20hours/week) for this purpose. **The Court held that
the room is not separate from the taxpayer’s house as it was readily available for
family/non-professional purposes. The ‘essential character of the expenditure’ (reference to Lunney
v FCT) is of ‘capital, private and domestic nature’, thus, NOT deductible.
[Case] Forsyth v FCT – not deductible
A deduction was denied for rent paid by a barrister to the trustee of his family trust which owned
the home in which lived and contained his home study. **The HC found the barrister used the study
for ‘convenience’ rather than ‘compulsion’. The rent was not incidental or relevant to gaining of his
assessable Y. Therefore the expense is not deductible.
o
Taxation Ruling TR93/30 (pg314)
The ruling makes clear distinction between:
 ‘Occupancy expenses’ (e.g.: rent, interest, rates and insurance premiums), and
 ‘Running expenses’ (e.g.: heating, cooling, lighting and depreciation).
The ruling states that where office = place of business, relevant portion of expenses may be
deducted. However, where home office is used for Y-earning activities, but does not have
character of a place of business, ONLY relevant proportion of running expenses may be deducted.
• Rent and Licence Fee Expenses (pg314):
If they are of private or domestic nature, they are not deductible.
See Slides 19-21: Exempt Y, List of specifically prevented items &
Exclusions
Page 56 / 61
WEEK 9
Chapter 14 – Specific Deductions
18.3
REPAIRS S25-10 (pg 375)
S25-10 ITAA97 provides deductions for expenditure on ‘repairs’ to premises and depreciating assets held or
used for the purpose of producing assessable income. If used only partly for that purpose, you can deduct
so much ‘as is reasonable in the circumstances’.
Nature of a repair (slide 3)
In essence, repair = restoring an asset to its previous condition, to make good deterioration due to wear and
tear without changing its essential character/function.
= ‘renewal or replacement of subsidiary parts of a whole’ BUT ≠ ‘reconstruction of the entirety’
Distinguish repair from:
• ‘Initial Repairs’ – where repairs are made to make asset ready for use for 1st time (cost = k)
• ‘Improvement’ – which involves making item functionally better than it is originally.
• ‘Replacement’ – involves substitution of an original item with new item.
• Initial Repairs (slide 4/pg376)
Fixing defects in items which existed at time of acquisition = capital nature. The defects are not attributable
to wear and tear arising from use of asset, but instead = cost of improving asset beyond it original state.
[Case] W Thomas & Co Pty Ltd v FC of T – not deductible
The taxpayer was denied deductions for cost of extensive renovation undertaken on a dilapidated building
which it recently acquired. The renovation was necessary to make building suitable for the business. ** The
HC held that expenditure incurred on assets which (due to state of disrepair) is not capable of being put to
use for its intended Y-producing purpose, then expenditure incurred in rendering asset suitable for its
intended Y-producing purpose = capital in nature.
[Case] Law Shipping Co Ltd v IRC – not deductible
Law Shipping bought a ship for £97,000 and spent £51,558 on repairs to make it seaworthy. **The Court
held that the cost of the repairs = capital in nature, and is referred to ‘an addition to the price’. Thus, it is
NOT deductible.
See TR 97/23 – Slide 4
• Replacement (slide 7/pg376)
Repair often involves replacement of PARTS of an asset with new parts. Even replacement of large portions
of an asset = repair as long as original asset remains in existence and is not replaced by a new asset.
Replacement of (substantially) the whole of the asset = Not deductible
Replacement of a part of the asset = Deductible
[Case] Rhodesia Railways Ltd v CIT Bechuanaland – deductible
Taxpayer, owner of a 588 mile long railway line was allowed deductions for expenditure incurred in
renewing 74 miles of track. ** The Privy Council held that expenditure is a non-capital repair as renewals
merely restored the line in its original condition in which they could continue to earn Y.  see slide7
[Case] Lindsay v FC of T – not deductible
Deductions were denied for costs incurred in repairing a slipway. Due to unavailability of certain materials, a
substantial proportion of the original shipway was demolished and replaced with new materials. ** HC held
that extensive works went beyond a repair and constituted the acquisition of a new capital asset.
[Case] Lurcott v Wakely and Wheeler – pg 375
• Improvement or Restoration of item to make it functionally better (slide 5/pg377)
Repair = restores item to its former condition v/s “Improvement” = makes item (significantly) functionally
better than it previously was. Improvement typically = capital nature.
Page 57 / 61
[Case] Western Suburbs Cinemas Ltd v FC of T – not deductible
A theatre owner spent $6,000 replacing a dilapidated ‘celotex’ ceiling with a new improved ‘fibro’ ceiling.
**The High Court held the expenditure as capital in nature, as new ceiling provided several advantages over
the old one. The HC also rejected deduction for the ‘notional cost’ argument. When a taxpayer has 2
options, one involving expenditure which will allow deduction and the other not allowing deduction, and
for whatever reason chose the 2nd option, he cannot have his Y tax assessed as if he opt for option 1.
o TR 97/23 - Equivalent Materials does not include:
 Copper to replace galvanised pipe
 Wall titles to replace plaster sheet
 Bluestone to replace concrete
(Considered as improvement)
o Notional Repairs
A taxpayer only obtains a deduction for the cost of the repairs which he or she actually carries out – cost
must be actually incurred. There is generally NO deduction for notional costs.
[Case] Western Suburbs Cinemas Ltd v FCT – not deductible
Capital work consist of a buildings, or an extension, alteration or improvement to a building (s43-20(1)), as
well as structural improvements (eg sealed roads and driveways, bridges, pipelines and fences: (s43-20(3))
or extensions, alterations or improvements to structural improvements, whether in or outside Australia.
Construction expenditure is capital expenditure incurred in respect of the construction of “capital work”
(s43-70(1)). It does NOT include expenditure listed in s43-70(2) (eg expenditure on: acquiring land;
demolishing existing structures; clearing, filling, draining or otherwise preparing the construction site prior
to carrying out excavation work; landscaping; plant; or specified kinds of property for which deductions are
available under specified provisions).
20.2
CAPITAL ALLOWANCES Div 40 (pg 405/slide8-30)
Deductions for capital expenditure are NOT allowable under general deduction provision in s8-1 ITAA97 as it
fall within the 1st negative limb of the section, but will only be deductible if it satisfies the specific provision.
S 40-25(1) of Div 40 (introduced on 1 July 2001) provided a deduction for the ‘decline in value’ of a
depreciating asset that is held during the year for a taxable purpose.
Under s40-25(7), “Taxable purpose” means: (slide8)
• Producing assessable income
• Exploration or prospecting
• Mining site rehabilitation
• Environmental protecting activities
There are 3 types of capital expenditure for which a deduction is specifically allowed:
• Expenditure on depreciating assets
• Blackhole capital expenditure by business, and
• Capital works expenditure
Depreciating asset (pg406)
A “depreciating asset” (s40-30 ITAA97) = asset that has a limited “effective life” and can reasonably be
expected to decline in value over the time that it is used.
Examples of depreciating assets that are allowed capital allowances under s40-30:
Page 58 / 61
•
•
•
•
•
Fridges (in supermarkets)
Display cabinets (in cake shops)
Computers and furniture used in an office
Tools and trucks by construction workers
Aircraft and ships used by airline or shipping company.
It expressly excludes (slide 12):
• Land
• Trading stock
• Intangible asset, e.g. Goodwill which is a premium paid to acquire a business
 (Except those specified in s40-30(2) namely = mining, quarrying or prospecting rights or
information, intellectual property, in-house software, spectrum licences, datacasting
transmitter licenses, indefeasible right to use international telecommunications submarine
cable systems [where expenditure incurred before 21 Sept 99], capital works (Div 43), Cars
(where ‘cents/km or 12% method’ is used), Depreciating assets associated with investments in
Australian films.
Holder (pg407/slide13)
‘Holder’ of a depreciating asset  Reference to table in s40-40
In general rule, “holder” = legal owner, i.e. = “economic owner” (ie the entity which is able to access the
asset’s economic benefits while stopping other entities from doing the same).
Legal owner: person who purchases and owns the asset
Economic owner: person who hires or leases that particular asset, not actually own the asset
Exceptions:
In some cases, legal owner ≠ economic owner. In that sense, it is the economic owner who will be treated as
the holder of the asset. E.g.: Under a “hire purchase arrangement”, the holder of the asset = economic
holder, i.e. the lessee (not the lessor/legal owner of the asset).
Decline in Value (pg407/slide14)
= Start time of decline in value, i.e. time at which entity 1st uses the asset or has it installed ready for use for
any purposes.
2 methods for calculating ‘decline in value’:
(1) Diminishing Value Method
(2) Prime Cost Method
NOTE: Once the method is chosen for a particular asset, CANNOT change it afterwards (s40-130).
However, you can choose to use a different one for a different asset.
(1) Diminishing Value Method (DMV):
Under this method, the value of a depreciating asset decreases constantly proportionate to its
remaining cost at the end of each year.
DMV
(Pre-10 May 2006 Assets)
=
DMV
(Post-10 May 2006 Assets)
=
Base Value
x
Days Held
365
x
150%
Asset’s Effective Life
Base Value
x
Days Held
365
x
200%
Asset’s Effective Life
Page 59 / 61
(2) Prime Cost Method (PCM):
Under the prime cost method, the value of a deprecating asset decreases uniformly over its effective
life so as to produce a “straight line” write-off.
PCM
=
Asset Cost
x
Days Held
365
x
100%
Asset’s Effective Life
Therefore, DMV initially gives higher deductions that PCM, but provides lower deductions later in the
life of the asset as its remaining cost decreases.
 See Examples on slides 20-21

Effective Life (pg408/slide16):
Can be determined by:
(a) By Commissioner under s40-100/TR 2011/12
(b) Self assessment under s40-105 (s40-95). We need to consider:
- Reasonable wear and tear
- Must recalculate where original estimate no longer accurate
- Special rules in relation to intangibles.
(E.g.: usually asset A effective life = 10 years, but, you use it more heavily, thus now effective
life is less, must recalculate.)

Asset’s cost – PCM (pg408/slide17)
1st element: Amount paid to hold the asset (usually calculated at time entity starts holding the asset)
2nd element: Amount paid for each economic benefit contributed to bring the asset to its present
condition & location since it began to hold the asset (calculated after entity start holding the asset)
Excluded amounts:
- Input tax credits
- Otherwise deductible amounts (E.g. Cost for repair of an asset which is deductible under s25-10 is
not included in the 2nd element of the cost base as this would provide a double benefit to the entity)
- Excess over car limit $57,466 (2011/12)

Base Value – DVM (pg409/slide18)
 For the Start Year  Asset’s Cost
 For Subsequent Years  Opening adjustable value for the year + Any element included in the 2nd
element of its cost for the year.
Opening adjustable value of an asset for an income year = Adjustable value at end of the previous year.

Days Held (pg409/slide18)
= number of days the entity held the asset in the income year (ignore any days that it did not use it or
have it installed ready for use)
Immediate deduction for asset that cost up to $300 (pg410/slide19)
Immediate deduction is available for depreciating assets costing < $300 if:
i.
Asset used to produce assessable income AND
ii.
You are a non-business taxpayer S40-80(2).
Rule does not apply to asset that is part of a set of assets that taxpayer stats to hold in the Y year where
total cost of the set of assets > $300.
Car Limit (pg411)
Balancing Adjustments (pg411/slide22)
A balancing adjustment event arises where an entity:
Page 60 / 61
•
•
•
•
Stops holding a depreciating asset (eg. Sells it or loses it)
Stops using a depreciating asset for the any purpose and expects never to use it again
Has not used a depreciating asset decides never to use it, or
Changes its interests or holdings in a depreciating asset (s40-295)
Termination value > Adjustable value, difference = assessable income
Termination value < Adjustable value, difference = deductible expense
Pooling rules for low-cost and low-value assets (pg413/slide25)
Use ‘low value pools’ when:
a) Low-cost assets = asset costing < $1,000 including GST (s40-425(2))
b) Low-value assets = asset with opening adjustable value < $1,000 (s40-425)
Benefit of pooling = decline in each asset value does not need to be calculated individually. Instead, pooled
assets are written off under s40-440 at the diminishing value rates of:
- General rate of 37.5% p.a (assuming assets in pool have an effective life of 4years)
- Special rate of 18.75% to low-cost assets in 1st year that they are allocated to a pool
NOTE: Non-business assets costing <$300 cannot be allocated to a pool, i.e. they are expensed (an
immediate deduction) S40-425(4).
Calculating Decline in Value (pg414/slide27)
The following steps are involved in calculating the decline in value of assets in the pool:
Step 1: 18¾% x cost of each low cost asset
Step 2: 18¾% x new second element cost
Step 3: 37½% x closing pool balance and
37½% x opening values of low value assets
Step 4: Add the above amounts to get the decline in value of the depreciating assets in the pool.
 See Steps in calculating Decline in Value and Examples on slides 27-29 or pg414
Business-related ‘Black hole’ Capital expenditure (pg415/slide30)
S40-880 permits certain capital expenditure over a period of 5 years (starting with year expenditure is
incurred). It is designed to operate as a ‘provision of last resort’ that grants deductions for business related
expenses that are allowed under general provision of s8-1. The deduction is available for capital expenditure
incurred from 1 July 2005.
The expenditure must relate to business that taxpayer carries on for a ‘taxable purpose’ and must not fall
within the exclusions contained in s40-880(5). It excludes expenditure to the extent that it: (pg416)
 See slide 30 or pg 416 for list of exclusions
20.4
INVESTMENT ALLOWANCES Div 41 (pg 416/slide31)
Investment allowance = ‘bonus/additional’ deduction (10%, 30% or 50%) for eligible new business
investment made from 13 Dec 08 to 31 Dec 09 on tangible depreciating assets.
 See slide 31 or pg 416/7
20.5
CAPITAL WORKS REGIME Div 43 (pg 418/slide32)
Capital allowance in Div 40 does not allow taxpayers to write-off cost of acquiring land. Under common law,
land includes ‘fixtures’ (e.g. buildings) that are attached to land. Thus, cost of building is not deductible
under Div 40. However, Div 43 allows us to claim deductions for cost of constructing items under ‘capital
works’ regime.
 See slide 32 or pg 418/20 for Rates and period of deduction of capital works.
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