79018 Taxation Law
Residence and Source (tax rates, offsets, PAYG) ................................................................ 2
Tax Formula, Rates, Offsets and PAYG ............................................................................ 10
Taxation law Methodology ............................................................................................. 16
Types of Income, Ordinary and Statutory ........................................................................ 23
Capital Gains Tax (CGT) .................................................................................................. 43
Fringe Benefits Tax (FBT) ................................................................................................ 51
Deductions ..................................................................................................................... 54
Tax accounting, trading stocks + SBE’s ............................................................................ 73
Business entities, sole traders + partners......................................................................... 80
Trusts ............................................................................................................................. 89
Companies and Shareholders .......................................................................................... 92
Goods and Services Tax (GST) ......................................................................................... 96
Tax Planning, Administration and Anti-Avoidance ........................................................ 100
1
Residence and Source (tax rates, offsets, PAYG)
General Jurisdictional Rules
Residents vs. Foreign Residents:
1. Residents are assessed on their ordinary income and statutory income from ALL sources
a. See ss 6-5(2), 6-10(4) ITAA97
2. Foreign residents are assessed on their ordinary income and statutory income from Australian
sources
a. See s6-5(3)(a), 6-10(5)(a) ITAA97
3. Subject to specific exceptions
Residence
Why is the concept of ‘residence’ relevant?
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General jurisdictional rules
Residents (not Foreign Residents) are liable to Medicare Levy + Medicare Levy Surcharge
Different rates of tax apply for Residents vs Foreign Residents
Most tax offsets are only available to Residents (not Foreign Residents)
Non-residents and temporary residents disregard capital gains and capital losses regarding CGT
assets that are not ‘taxable Australian property’
Application of international tax regimes
Definition (for tax purposes) s 995-1 ITAA97, s6(1) ITAA 36
Resident or resident of Australia means:
(a) a person, other than a company, who resides in Australia and includes a person:
(i) whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place
of abode is outside Australia;
(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the
year of income, unless the Commissioner is satisfied that the person's usual place of abode is outside
Australia and that the person does not intend to take up residence in Australia; or
(iii) who is:
(A) a member of the superannuation scheme established by deed under the Superannuation Act
1990 ; or
(B) an eligible employee for the purposes of the Superannuation Act 1976 ; or
(C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B); and
(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on
business in Australia, and has either its central management and control in Australia, or its voting power
controlled by shareholders who are residents of Australia.
Definition (for tax purposes) s 995-1 ITAA97, s 6(1) ITTA 36
Individuals: 4 alternative tests: - ONLY ONE TEST IS NEEDED TO BE SATISFIED TO PROVE RESIDENCY
1. The person resides in Australia
2. The person’s domicile is in Australia, unless the Commissioner is satisfied that their permanent
place of abode is outside Australia
3. 183-day test
4. Commonwealth superannuation test
Companies:
1. Place of incorporation
2. Central management and control
3. Control of voting power
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Individuals:
Individuals – Test 1 ‘RESIDE’
 ‘reside’ = to dwell permanently or for a considerable time
 Question of fact and degree (FCT v Miller (1946) 73 CLR 93)
 Depends on circumstances of case
 Look at quality/character of a person’s behaviour while in Australia
 TR 98/17:
o Taxpayer’s intention or purpose of presence
o Taxpayer’s family and business/employment ties
o Maintenance and location of taxpayer’s assets
o Taxpayer’s social and living arrangements
o Period of taxpayer’s physical presence in Australia is also relevant (but not
determinative)
Joachim v FCT (2002) ATC 2088
Facts: Mariner (who had migrated from Sri Lanka with his family to Australia in 1994) was employed by a
Sri Lankan maritime agency. He spent 316 days during the relevant income year outside Australia on Sri
Lankan vessels. During this time he had Australian permanent residency and maintained a family home in
Australia, returning home between contracts.
Held: AAT concluded he was a resident of Australia:
“Physical presence and intention will coincide for most of the time but few people are always at home.
Once a person has established a home in a particular place, even involuntary, a person does not
necessarily cease to be resident there because he/she is physically absent. The test is, whether the
person has retained a continuity of association with the place, together with an intention to return to
that place and an attitude that the place remains home.”
Levene v IRC [1928] AC 217
Facts: UK subject who had always lived in London, left UK, to live abroad on medical advice. He
surrendered the lease on his house. From 1919-1925 he had no fixed abode, living in hotels in France &
Monaco, and returning to UK for 5 months each year to visit family & obtain medical advice etc during
which time he stayed in hotels.
Found: Taxpayer was an ordinary resident of the UK given his habits of life, regularity of visits, ‘a bird of
passage of almost mechanical regularity’, ties with UK and freedom of his attachments abroad.
IRC v Lysaght [1928] AC 234
Taxpayer was a retired managing director of UK company who moved with his family to large estate in
Ireland. He was subsequently appointed advisory director of the UK company & required to visit UK for
one week every month to attend meetings etc, during which time he stayed at this brother’s house or in
hotels.
Held: Taxpayer was an ordinary resident of UK (despite the fact he had a home in Ireland and no
established home in UK).
Individuals – Test 2 ‘DOMICILE’
An individual is a resident of Australia if his/her domicile is in Australia, unless the Commissioner is
satisfied that the person has a permanent place of abode outside Australia (s6(1)(a)(i))
 Domicile is determined according to the Domicile Act 1982:
o Domicile of origin at birth
o Domicile of choice – country where the taxpayer intends to make their home indefinitely
 IT 2650 Commissioner’s views on whether the person has a permanent place of abode outside
Australia
o Intended and actual length of the individual’s stay in the overseas country (2+ years is
substantial)
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o
o
o
o
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Any intention to return to Australia at some definite point in time or to travel to another
country
Establishment of a home outside Australia
Abandonment of any residence or place of abode the individual may have had in
Australia
Duration/continuity of the individual’s presence in the overseas country
Durability of association that the individual has with a particular place in Australia
FCT v Applegate 79 ATC 4307
Facts: Taxpayer moved to Vila to establish an office of a Sydney law firm. He stayed there for two years
but returned on one occasion when his wife had a baby. The taxpayer became ill several years later and
returned to Australia.
Court looked at whether taxpayer’s “permanent place of abode was outside Australia”.
Held: Court held that permanent does not mean everlasting/forever and is assessed objectively each
year.
Taxpayer was found to have a permanent place of abode outside Australia (despite the fact that he
ultimately intended to return to Australia & did return when he became ill)
“The word ‘permanent’ as used in para (a)(i) of the extended definition of ‘resident’ must be construed as
having a shade of meaning applicable to the particular year of income under consideration. In this
context it is unreal to consider whether a taxpayer has formed the intention to live or reside or to have a
place of abode outside of Australia indefinitely, without any definite intention of every returning to
Australia in the foreseeable future...What is of importance is whether the taxpayer has abandoned any
residence or place of abode he may have had in Australia. Each year of income must be looked at
separately. If in that year a taxpayer does not reside in Australia in the sense in which that word has been
interpreted, but has formed the intention to, and in fact has, resided outside Australia, then truly it can
be said that his permanent place of abode is outside Australia during that year of income. This is to be
contrasted with a temporary or transitory place of abode outside Australia.” (Northrop J at 4314)
Individuals – Test 3: ‘183 DAYS’
An individual is a resident if he ‘has actually been in Australia, continuously or intermittently, during more
than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is
outside Australia and that he does not intend to take up residence in Australia’ (s 6(1)(a)(iii)
 Assists in determining whether a person has commenced residing in Australia
 Generally not relevant for taxpayers departing Australia (eg. an individual who has been a
resident during the year who subsequently leaves Australia before the end of the year and is no
longer a resident under the domicile test for the remainder of the year)
Individuals – Test 4:
A member of a Commonwealth superannuation fund, who is an eligible employee (eg. Commonwealth
public servants such as foreign diplomats living abroad) and the member’s family are deemed to be tax
residents of Australia
Companies:
Companies – Test 1 ‘INCORPORATION’
A company is a ‘resident’ of Australia if it is incorporated in Australia, regardless of whether it carries on
business overseas, is managed overseas or is controlled by foreign shareholders
Companies – Test 2 ‘CENTRAL MANAGEMENT AND CONTROL’
A company is a resident of Australia if it:
1) ‘carries on business in Australia’; and
2) Has its ‘central management and control in Australia’
Draft Tax Ruling TR 2017/D2: Bywater Investments Ltd & Ors v. Commissioner of Taxation [2016] HCA 45
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Companies – Test 3 ‘CONTROL OF VOTING POWER’
A company is a resident of Australia if it ‘carries on business in Australia’ and has its ‘voting power
controlled by shareholders who are residents of Australia’
 Shareholder – must be registered (or entitled to be registered) as a shareholder in the company’s
register (mere beneficial ownership by itself insufficient)
Source
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Primarily relevant for Foreign residents (General Jurisdiction Rules)
Ascertaining the actual source of a given income is ‘a practical, hard matter of fact’ (Nathan v
FCT (1918) 25 CLR 183)
Apportionment may be appropriate where income is derived from multiple sources
Services: generally, the place where the performance of services occurs: FCT v French (1957) 98
CLR 398; FCT v Efstathakis 79 ATC 4256
Business Income: generally, where the business is transacted (United Aircraft Corp (1943) 68 CLR
525)
o Eg. sale of goods – place where the goods are sold
Rental income: fixed property
o Eg. land – generally where the property is located
o Moveable property – generally where the lease agreement was entered into and the
goods taken)
Interest: generally, the place where the contract for the loan was made and where the money
was advanced (FCT v Spotless Services 95 ATC 4775)
o If the interest arises under the terms of a business contract, the place where the
business is transacted (Studebaker Corporation v CT (1921) 29 CLR 225)
Dividends: the place where the company derived its profits (Esquire Nominees Ltd v FCT 73 ATC
4114)
Royalties: s6C ITAA36 generally deems royalties paid/credited to non-residents to have an
Australian source to the extent that they are:
o Outgoings incurred by a resident that are not incurred in carrying on a business at or
through a permanent establishment outside Australia
o Outgoings incurred by a foreign resident that are incurred in carrying on a business at or
through a permanent establishment in Australia
Permanent establishment
‘permanent establishment’ is defined in s6(1) ITAA36 as ‘a place at or through which a person carries on
any business’.
It includes:
 A place where the person is carrying on business through an agent
 A place where the person has or is using or installing substantial equipment/machinery
 A place where the person is engaged in a construction project
 A place where goods are manufactured/assembled/processed/packed/distributed (provided
specific criteria are met)
Does NOT include:
 A place where the person is engaged in business dealings through a bona fide commission agent
or broker who, in relation to dealings of that kind, not being a place where the person otherwise
carries on business
 A place where the person is carrying on business through an agent who:
o Does not have, or regularly exercise, authority to negotiate or conclude contracts, or
o Has authority to fill orders from a stock of foods or merchandise situated in the country
where the place is located, but does not regularly exercise that authority, not being a
place where the persons otherwise carries on business
 A place of business maintained by the person solely for the purpose of purchasing goods or
merchandise
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Temporary residents
A temporary resident is a person who:
 Holds a temporary visa
 Is not an Australian resident under the Social Security Act 991, and
 Does not have an Australian resident spouse
Temporary residents are generally treated similarly to non-residents
Tutorial Questions
How to interpret statutes and case law
1. What is the relationship between statute and case law (common law)?
a. Statute law (the law made by the Commonwealth, State and Territory Parliaments)
b. Case law (common law) is based on the reported decisions of judges in cases that come
before them – comes from precedent
c. Statute law is applied and interpreted by case law – interpret law, fill gaps from statute
and also creates law
2. What happens if there is a conflict between statute and case law?
a. Statute law prevails over common law (case law)
b. Statutes are interpreted in accordance with common law principles of interpretation
c. But ‘principle of legality’ ensures that statutes do not casually obliterate at least some
common law rates
Jurisprudential Interpretation
1. Explain the doctrine of precedent ‘stare decisis’
a. ‘To stand by things decided’ – it is the doctrine of precedent
b. The judges will refer to other cases previously brought to the court and are bound to
apply the ruling (ratio decidendi) used in that case.
c. This is to ensure fairness and that similar or same issues are dealt with consistently
d. The HCA is not bound to follow its own past decisions, but usually so if there are similar
facts
e. Each court is bound by decisions of courts higher in its hierarchy
2. What is the difference between ‘ratio decidendi’ and ‘obiter dicta’?
a. Ratio decidendi: is the ‘reason for the decision’, is what the judge ultimately decides and
provides the binding reasons for it. Not every judicial decision contains this, and as case
law increases, there is reduced opportunity for a court to issue ratio decidendi.
b. Obiter dicta: are just ‘remarks in passing’, which are comments/legal principles that
judges may make but are not part of the final decision – not strictly relevant to deciding
the case. They are not binding but may be persuasive. They can be a restatement of an
existing settled principle of law.
3. In which courts/tribunals are tax cases decided?
a. Administrative Appeals Tribunal (AAT)
b. Federal Court
c. Full Federal Court
d. High Court of Australia
Statutory Interpretation
1. What is statutory interpretation and why is it important?
a. Statutory interpretation is the process of ascertaining the meaning of words/phrases
used in legislation.
b. Spiegelman CJ, of the Supreme Court of NSW: the law of statutory interpretation has
become the most important single aspect of legal practice. Significant areas of the law
are determined entirely by statute. No area of the law has escaped modification.
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2. Identify the key legislative and common law rules that are relevant to statutory interpretation
a. Legislative Rules – Acts Interpretation Act 1901 (Cth) - s 15A, s15AA, s15AB, s15AC
b. Common Law Rules – Literal Rule, Golden Rule, Mischief Rule
3. Outline the modern approach to statutory interpretation
a. An approach to construction that promotes the purpose/object of the statute, i.e.
‘purposive approach’ which requires courts to have regard to broader context of the
legislation from the outset, not just when ambiguity arises (CIC Insurance Ltd v
Bankstown Football Club (1997) 187 CLR 384)
b. Determine the purpose of parliament in passing the legislation and adopt an
interpretation that is consistent with that purpose
4. Identify the key definitions section in the ITAA97 and ITAA36
a. Defined Terms – S 6 ITAA36 / s995-1 ITAA97
5. In ITAA97 what does it mean when a word is marked with an asterisk *?
a. In ITAA97, defined/technical words are marked with an asterisk *
FCT v Applegate 79 ATC 4307
1. Summarise the material facts (parties to dispute and facts underlying the case)
a. Appeal by the Commissioner from a decision of Supreme Court of NSW
b. Parties: taxpayer, solicitor employed by a Sydney firm and the Federal Commissioner of
Taxation
c. Facts:
i. A taxpayer, a solicitor employed by a Sydney firm, was sent by the firm to Vila to
open and run a branch office. It was intended by both taxpayer and his firm that
he would return to the Sydney office after the lapse of an indefinite but
substantial period of time.
ii. He gave up his tenancy of a flat in Sydney and after the first two weeks in Vila,
moved with his wife into a house there that he leased for 12 months with an
option to renew for a similar period.
iii. Taxpayer returned to Sydney for the birth of his firstborn, and then he went
back to Villa until the end of 1972 and came back to Sydney for a holiday. Mid
1973 – taxpayer became ill and returned to Sydney for treatment – decided that
the climate and environment was dangerous for him and he should return to
Sydney to live.
iv. He returned to Villa until Sept 1973 when he was succeeded by another
employee. When he was in Vila, he kept no assets in Australia other than life
policy which he continued to pay premiums, and a membership of a hospital
fund. His wife and applied for and received child endowment which he did know
about.
v. He claimed that the salary he earned in Vila was exempt from Australian tax
under s 23(r) as income derived by a non-resident from sources wholly out of
Australia
2. Identify the main issues considered by the court
a. Whether the taxpayer was a non-resident of Australia
b. Whether he had a permanent place of abode outside Australia
c. What is the meaning of ‘permanent’ as from s 6(1), s 23(r) or the ITAA36
3. Identify the outcome of the court’s decision
a. FCA: appeal was dismissed
b. During the year ended 1972, the taxpayer had a permanent place of abode outside
Australia, notwithstanding that he ultimately intended to return here. So, he therefore
was a non-resident in the definition of s 6(1) and was exempt from Australian tax on his
income earned in Vila
4. Summarise the prior history of the case in any lower courts
a. From Supreme Court of NSW: Commissioner found that the taxpayer could not be
regarded as a non-resident despite the income being sourced out of Australia because
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he did not have a permanent place of abode outside Australia during the relevant
period, and because the taxpayer intended to return to Australia
i. Had held that the taxpayer’s income was exempt
ii. The Commissioner then appealed to the FFC
5. Identify and discuss the court’s legal reasoning underpinning the decision (include discussion
of any previous seminal cases relevant to the legal reasoning)
a. Per Franki J: Permanent place of abode outside Australia'' means something less than a
permanent place of abode in which the taxpayer intends to live for the rest of his life.
The inquiry whether there is a permanent place of abode outside Australia is an
objective one, and the taxpayer's intention as to the length of time he will reside in a
place outside Australia is no more than one relevant factor to be taken into account.
i. Held each year must be looked at separately
b. Per Northrop J.: If, in the relevant income year, a taxpayer does not reside in Australia in
the sense in which that word has been interpreted, but has formed the intention to
reside, and in fact has resided, outside Australia, then it can be said that he has a
permanent place of [4308]abode outside Australia. Here, the taxpayer intended to
abandon his place of residence in Australia and establish a place of residence outside
this country.
c. Per Fisher J.: ``Permanent place of abode'' means the taxpayer's fixed and habitual place
of abode. Material factors for consideration are the continuity or otherwise of the
taxpayer's presence, the duration of his presence and the durability of his association
with the particular place. The taxpayer's intention to make his home for the time being
in his place of abode outside Australia is an important element in characterising that
place of abode as his permanent place of abode.
6. Discuss and analyse the impact of this decision on the relevant aspects of Australian taxation
law
a. It is important to know whether a person is a permanent resident of Australia because
then they should be liable to pay tax
b. Provided that, maybe Australian citizens will try to do this to avoid paying Australian tax
c. How to interpret the word ‘permanent’ and that if the same case occurs, we know how
to apply the rule as precedent (IT 3650)
d. Your responsibility to provide all the information to the Commissioner
Extra Question in Class:
Phil, an 18 y.o. unmarried Australian football player, accepted an 18-month contract to play in the UK for
AUD $6m. The contract commenced on 1 January 2016. Phil has a cousin the UK and he decided he would
stay with his cousin at least for the first year. Phil dealt with his Australian assets in the following manner:
he sold his car, leased his unit in Sydney for 12 months and closed his bank account after transferring the
money to the UK. His parents and sister stayed in Australia. He was not sure how long he would stay
away. He was hoping to get another contract at the expiration of the original one. However, he would not
know whether he could do this until his original contract had expired – but he had the ultimate intention
of returning to Australia. Unfortunately, he had an accident in the YK on 30 December 2016. So, his knee
was badly damaged and his football career was over. His contract was terminated and he returned to
Australia on 4 April 2017.
a) Advise Phil whether or not he is an Australian resident for the income tax years ended 30 June
2016 and 2017
T1: Reside
T2: Domicile
T3: 183 Days
T4: Super
2016
His intention
He had only
July 2015 to last day of
N
was to go
lived at his
2015
overseas to play cousin’s house
(30+31+30+31+30+31=184
football, his
for 18 months –
days) Y
career N
football player
that always
travels Y
8
2017
N
He didn’t
establish a
permanent place
of abode outside
Australia – Y
Came back 4 April 2017
N
N
‘Reside’:
- Intention is to stay in UK for at least a year, to play football in the UK
- His immediate family are in Aus
- Assets are all in UK as he had sold his car, leased his unit and closed his bank account
- Living arrangements with his cousin the UK
‘Domicile’
- Intended stay in UK was 12 months and intended to return back to Australia
- He was staying with his cousin in the UK but did not have a place of his own
- He had abandoned his residence in Australia
b) Advise Phil of the source of the income he derived during the above period
As he was not a resident – rent
Or his income
Star Limited is incorporated in The Cayman Islands. Its BoD meets once a year in The Cayman Islands. All
the shares in Star Limited are held by Sun Limited, a company incorporated in Canada. The CEO of Star
Limited resides in Sydney and makes most of the major decisions for the company from his office in
Sydney as he has a special arrangement with the directors of Star Limited whereby he can override any
decisions they make. The shareholders of Sun Limited are not residents of Australia. Star’s only trading
activities are carried out in Canada. The CEO is the only presence Star Limited has in Australia. Sun
Limited has no presence in Australia. All of the above events relate to the year ended 30 June 2017.
c) Advise Star Limited on its residency status for Australian income taxation purp;oses for the
year ended 30 June 2017
 T1: N – the company is not incorporated in Australia, but in The Cayman Islands
 T2: N – the company does not carry on business in Australia, despite it having its ‘central
management and control’ in Australia – as CEO resides in Australia
 T3: N – the shareholders are not residents of Australia and therefore voting power is not in
Australia
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Tax Formula, Rates, Offsets and PAYG
Income Tax Legislation
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Income Tax Assessment Act 1997 (ITAA97)
Income Tax Assessment Act 1936 (ITAA36)
o These Acts operate concurrently, both Acts apply
ITAA97 s1-3
Difference in style not to affect meaning:
(1) This Act contains provisions of the Income Tax Assessment Act 1936 in a rewritten form.
(2) If:
(a) that Act expressed an idea in a particular form of words; and
(b) this Act appears to have expressed the same idea in a different form of words in order to use
a clearer or simpler style;
the ideas are not to be taken to be different just because different forms of words were used.
Australian Income Tax – the Tax Formula
S4-1 ITAA97 imposes an obligation to tax on taxpayers
Income tax is payable by ‘each individual and company, and by some other entities’
S4-10(1) – tax period
Income tax must be paid for each ‘financial year’ (defined in 995-1(1) as 1 July to 30 June)
S 4-15
Taxable income = assessable income – deductions
 Assessable income = ordinary income (s6-5) + statutory income (6-10)
 Deductions = general deductions (s8-1), specific deductions (8-5)
Basic income tax liability = taxable income x rates
4-10 (3)
income tax payable/refundable = ((taxable income x rates) – tax offsets) – credits + levies/charges
 This is a more detailed version of s4-10(3). You should use this version for your calculations.
Individual ‘Tax Loss’
 Deductions equal Assessable Income, the taxpayer does not have a taxable income
 If Deductions exceed Assessable Income, the taxpayer may have a ‘Tax Loss’.
 Individuals can carry forward a Tax Loss for deduction in a later year
 Note: Special rules apply to corporate tax losses
s36-10 Tax Loss = Deductions – Assessable Income – Net Exempt Income
 ‘Net Exempt Income’ of a Resident taxpayer = the amount by which the taxpayer’s exempt
income from all sources exceeds the total of the losses and outgoings (other than capital losses
and outgoings) incurred in deriving that exempt income and any taxes payable outside Australia
on that exempt income (s36-20(1))
Example:
In 2016/17, Bert incurred a Tax Loss of $12,000. In 2017/18 he has assessable income of $50,000, workrelated deductions of $13,000 and net exempt income of $1,000. The 2016/17 Tax Loss is applied in
2017/18 as follows:
 2016/17 Tax Loss is brought forward and $1,000 of it is offset against his 2017/18 net exempt
income of $1,000
 The remaining $11,000 of his 2016/17 Tax Loss is offset against the amount of his 2017/18
assessable income that exceeds his deductions for the year, ie against $37,000
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
The Tax Loss is thereby exhausted, and Bert has $26,000 assessable income remaining that is
liable to tax in 2017/18
Note: where a taxpayer cannot deduct all or part of a Tax Loss in an income year, the undeducted
amount is carried forward until it has been exhausted (s36-15(6), (7)). An individual cannot choose the
year in which a Tax Loss is carried forward.
Summary of steps in calculating income tax payable/refundable
Step 1: Calculate taxpayer’s taxable income for the income year
Step 2: Calculate the basic income tax liability on the taxable income according to applicable tax rates
Step 3: Calculate taxpayer’s tax offsets for the income year
Step 4: Subtract tax offsets from basic income liability. The result is how much income tax is payable for
the financial year
Step 5: Credit is given for tax withheld by employer during the year
Step 6: Levies, charges and surcharges may then need to be added
Tax Rates (handout)
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Resident Individual Rates apply to resident individual taxpayers (a person is treated as a resident
if they are a resident at any time during the income year, or in receipt of certain social security
benefits)
An individual who is a resident for all of the income year is entitled to the tax-free threshold (but
if they are only a resident for part of the year, they are only entitled to part of the tax-free
threshold)
Foreign Resident Individual Rates apply to a ‘prescribed non-resident taxpayer’ (ie, a person
who at all times during the income year is a non-resident. If they are a resident for at least one
day, resident rates will apply, s3(1) Income Tax Rates Act 1986 Cth).
Prescribed non-resident taxpayers are not entitled to the tax-free threshold, and are not liable to
Medicare Levy or Medicare Levy Surcharge.
‘Progressive’ Individual Income Tax Rates vs. ‘Flat’ Rates for Companies
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Individuals pay tax at ‘Progressive’ rates. This means that the higher the Taxable Income of the
individual, the higher the rate at which tax is imposed. This aims to promote ‘vertical equity’.
Companies pay tax at a ‘Flat’ rate. This means that regardless of the level of Taxable Income,
companies are required to pay the same % proportion of the Taxable Income as tax.
Tax Offsets
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Tax offsets are sometimes also called ‘rebates’ or ‘credits’
Subtracted from Basic Income Tax Liability
Different from a ‘deduction’ (offsets are more favourable to taxpayer)
Generally only available to Resident taxpayers
Generally cannot be applied to reduce a taxpayer’s other tax liabilities (eg, Medicare levy
,Medicare levy surcharge)
Generally, can only reduce tax liability to nil (ie, non-refundable, excess tax offsets are lost)
However, there are exceptions (Div 65, 67 ITAA97) eg, refundable tax offsets - franking credit
offset, private health insurance offset, some tax offsets may be transferred to spouse
Apply in the order that gives the greatest benefit to the taxpayer (s63- 10 ITAA97)
Examples include:
o Franking credit offset
o Low income tax offset
o Foreign income tax offset
o Dependant (invalid and carer) tax offset
o Net medical expenses tax offset (note this is being phased out)
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o
o
o
Private health insurance tax offset
Zone tax offset
Seniors and pensioners tax offset
Franking Credit Offset
 ITAA97 s207-20(2)
 Available to shareholders who receive dividends from Australian-Resident Companies with
franking credits attached
 Tax offset is equal to the amount of franking credits attached
 Refundable tax offset for individuals
 These are withheld by the company (eg. tax) and so when you calculate taxable income you add
it back
Low income tax offset
 ITAA36 s159N
 Available to resident individual taxpayers whose taxable income is less than $66,667
 For 2017/18 maximum Low Income Tax Offset is $445 (See Handout)
 This amount is reduced by 1.5 cents for every dollar that the person’s taxable income exceeds
$37,000 (it is completely phased out once their taxable income reaches $66,667)
 Non-refundable
Foreign Income Tax Offset
 ITAA97 Div 770
Available where a taxpayer has paid foreign tax on income that is also taxable in
 Australia, ie included in their assessable income
 Amount of Foreign Income Tax Offset is based on total foreign income tax paid
 Limited to the amount of Australian income tax that would have been payable on the relevant
income
 If the amount is not more than $1000, taxpayer can claim the amount of the foreign income tax
as the Foreign Income Tax Offset
 If the amount is over $1000, taxpayer can either:
Claim only $1,000 as the Foreign Income Tax Offset; or
Claim Foreign Income Tax Offset up to the amount of the Limit (above).
Dependant (Invalid and Carer) Tax Offset
 ITAA97 s61-5
 Consolidates several former tax offsets relating to dependants
 The offset is only available to taxpayers maintaining certain classes of dependants who are
genuinely unable to work due to carer obligation or disability
 For 2016/17 the offset is $2,627 and is indexed annually.
 Reduces by $1 for every $4 by which the dependant’s adjusted taxable income exceeds $282 (ie
completely cuts out when dependant’s adjusted taxable income exceeds $10,790)
 Not available to a taxpayer whose adjusted taxable income exceeds the income limit for family
assistance purposes
 Operates subject to maximum amount and phase-out rules
Zone Tax Offset
 The zone tax offset applies to individuals living in prescribed remote areas of Australia – there
are 2 zones:
o Zone A (more harshly affected)
o Zone B (less harshly affected)
 A higher tax offset is available for individuals living in Zone A than Zone B (individuals living in
'special areas' within particular zones receive a higher tax offset)
12


Compensates individuals for the higher costs associated with living in these areas
The overseas defence force tax offset applies to Australian Defence Force personnel serving in
specified overseas locations
Seniors + Pensioners Tax Offset
 ITAA36 s160AAAA
 Low income aged individuals who receive specified kinds of social security pensions, such as the
'age pension' may be entitled to a non-refundable 'seniors and pensioners tax offset‘ (may be
transferred to spouse)
Medicare Levy and Medicare Levy Surcharge






ITAA36 s251S
Resident individuals are generally liable to pay
Medicare levy at the rate of 2% of taxable income
Subject to income threshold and phase-in rules (See Handout)
Foreign resident individuals do not pay the Medicare levy or Medicare Levy Surcharge
Medicare Levy - ATO Calculator available via:
https://www.ato.gov.au/Calculators-and- tools/Medicare-levy/
Note: Generally a taxpayer is not liable to Medicare Levy Surcharge if they have complying private
health insurance
The Medicare levy surcharge applies if:
 a resident individual’s (or, in the case of a couple, a family’s) 'income for surcharge purposes' for
an income year exceeds the relevant surcharge threshold; and
 they are not covered by private health insurance (must be a ‘complying health insurance policy’
s3(5) Medicare Levy Act 1986 Cth)
‘Income for surcharge purposes’ means (s995-1(1) ITAA97) the sum of the person’s taxable income,
reportable fringe benefits total, reportable superannuation contributions, and total net investment
losses, less, if relevant, the amount of superannuation benefit for which the person is entitled to an
offset under s301- 20(2). See further [2-050] Prescribed Text.
The Medicare levy surcharge is imposed on the total of the individual’s taxable income plus reportable
fringe benefits total for the year, at the rate of 1%, 1.25% or 1.5% as appropriate (see Handout)
PAYG


Tax Administration Act, Sch1
To help taxpayers meet their annual income tax liability, they are required to pay amounts of
their income at regular intervals as it is earned during the year. The system for collecting these
amounts is called "Pay as you go"
 PAYG Withholding (Pt 2-5)- Under PAYG withholding, amounts are collected in respect of
particular kinds of payments or transactions. Usually, someone who makes a payment to you is
required to withhold an amount from the payment, and then to pay the amount to the
Commissioner.
 10-5 summary of withholding payment
o eg, a payment of salary or wages to an employee
Tax Withheld – ATO Calculator available via: https://www.ato.gov.au/Calculators-andtools/Host/?anchor=TWC&anchor=TWC/questions#TWC/questions
Examples: Calculation of Tax Liability, etc
Example 1: Resident Individual, Franking Credit Offset + Medicare Levy
13
Ellie, who is employed by a finance company, is a single resident taxpayer with private health insurance.
During 2017/18 Ellie earns the following amounts:
 Salary of $100,000- $19,000 tax is withheld by her employer during the year and remitted to the
ATO
 Franked dividends of $7,000 with franking credits of $3,000
 Rent of $10,000 from an investment property
 Interest of $3,000
Ellie’s employer makes compulsory superannuation guarantee contributions for Ellie.
During 2017/18 Ellie’s deductible expenditure is:
 Self-education expenses of$4,000
 Gifts of $10,000
 Investment property repairs of $12,000
 Car expenses of $2,000
 Bank fees of $200
 Brokerage fees of $300
S4-15 Taxable Income = Assessable Income – Deductions
= (100,000 + 7,000 + 3,000 + 10,000 + 3,000) – (4,000+10,000+12,000+2,000+200+300)
= 123,000- 28,500 = 94,500
(Note: compulsory super guarantee contributions are not taken into account in calculating assessable
income)
Basic Income Tax Liability = Taxable Income x Rates
Applying 2017/18 Resident Individual Rates (see Handout) = 19,822 + (94,500-87,000) x 37%
= 22,597
S4-10(3) Income tax payable/refundable =
((Taxable Income x Rates) – Tax Offsets) – Credits + Levies/Charges
Subtract Tax Offsets
Ellie is entitled to an offset for the $3000 franking credits 22,597 – 3,000 = 19,597
Credit is given for tax withheld / PAYG
Ellie receives a credit for the $19,000 tax withheld by her employer during the year 19597 – 19,000 = 597
Add Levies/Charges
Ellie is liable to Medicare Levy
 94,500 x 2% = 1,890
 Ellie is NOT liable to Medicare Levy Surcharge because she has private health insurance
Income Tax Payable = 597 + 1,890 = 2,487
 When Ellie lodges her tax return for 2017/18, she will receive a notice of assessment for income
tax payable of 2,487
Example 2: Foreign Resident Individual
Danny is a foreign resident. He has taxable income of $120,000, made up of $29,000 from investments in
Singapore (and therefore from a foreign source) and $91,000 from providing services in Australia. As a
foreign resident, Danny only has to pay tax in Australia on the $91,000 derived from Australian sources
(s6-5(3) ITAA97).
S4-15 Taxable Income = Assessable Income – Deductions
= 91,000
Basic Income Tax Liability = Taxable Income x Rates
14
Applying 2017/18 Foreign Resident Rates =28,275 + (91,000-87,000) x 37% =29,755
(Note: Do not add Medicare Levy or Medicare Levy Surcharge because he is a foreign resident)
Example 3: Low Income Tax Offset
Rohan, a Resident, has taxable income in 2017/18 of $40,000.
S4-15 Taxable Income = Assessable Income – Deductions
= 40,000
Basic Income Tax Liability = Taxable Income x Rates
Applying 2017/18 Resident Individual Rates = 3572 + (40,000-37,000) x 32.5% =4,547
S4-10(3) Income tax payable/refundable =
((Taxable Income x Rates) – Tax Offsets) – Credits + Levies/Charges
Subtract Tax Offsets
Low Income Tax Offset
445 - ((taxable income - $37,000) x 1.5%) = 445 – (40,000-37,000) x 1.5%
= 400
4,547 – 400 = 4147
Add Levies/Charges
Medicare Levy
40,000 x 2%
= $800
Rohan is not liable to Medicare Levy Surcharge because his income is below the surcharge threshold.
Income Tax Payable = 4147 + 800 = 4947
Part Tax-Free Threshold Formula
An individual who is a Resident for only part of a year, eg because they commence living in Australia
during the year, is only entitled to a portion of the tax-free threshold, calculated according to the
following formula:
Part tax-free threshold = $13,464 +
($4,736 x number of months in the year the individual is a Resident) / 12 mths
Example 4: Part-Tax Free Threshold
Part tax-free threshold applies where taxpayer is a Resident for only part of the year
Jaipei arrives in Australia on 20 October 2017 to take up permanent residence. From 1 Feb 2018 to 30
June 2018, she earns $31,000. Jaipei has a reduced tax-free threshold because she is a Resident for only
part of the year (8 months from Nov 2017 to Jun 2018).
Part tax-free threshold = $13,464 +
($4,736 x number of months in the year the individual is a Resident / 12)
mths
= 13,464 + (4,736 x 8/12)
= 16,621
The first $16,621 of Jaipei’s taxable income is tax free. The remaining taxable income is taxed at the rate
of 19%
15
Taxation law Methodology
Jurisprudential Interpretation
Taxation Cases
Tax Cases are generally found in the following law report series:
 Australian Tax Cases (ATC)
 Federal Court Reports (FCR)
 Commonwealth Law Reports (CLR)
 Australian Tax Decisions (ATD)
Note: Tax cases are usually decided in the Administrative Appeals Tribunal, Federal Court, Full Federal
Court and High Court
Common Law Doctrine of Precedent ‘Stare Decisis’
A precedent is a principle established in a previous case/decision that is either binding on or persuasive
for the court in deciding a case which involves similar facts or legal issues.
General rules of Precedent are:
 Each court is bound by decisions of courts higher in its hierarchy
 A decision of a court in a different hierarchy or lower in the same hierarchy may be persuasive
but will not be binding
 Generally, a court will not consider itself bound by its own past decisions but will depart from
them only with reluctance
 Only the ratio decidendi of a past case is binding
 Obiter dicta (‘remarks in passing’) are not binding but may be persuasive
 Precedents do not lose their force by lapse of time
‘The rationale for the doctrine can be grouped into 4 categories: certainty, equality, efficiency and the
appearance of justice’ – Per Branson and Finkelstien JJ in Telstra Corporation v Treloar (2000) 102 FCR
595, 602
Ratio Decidendi
 Ratio Decidendi (the reason for the decision): pronouncements of legal principle necessary for

the judge’s decision on the established facts of the case
o ‘reason for deciding’
o Ruling given by the Judiciary on a contentious point of law essential to derivation of the
ultimate decision in a case
o It is a legal concept: not every judicial decisions contains a ratio decidiendi. Over time, as
the body of available case law increases, there is also reduced opportunity for a court to
issue ratio decidenci.
o Limitations:
 Only in relation to questions of law not questions of fact
 Must be in relation to a contentious question of law (i.e. must be more than a
mere judicial restatement of principle of law but must comprise a ruling on a
disputed principle of law)
 Parties to the dispute must argue the Question of Law before the Court (i.e.
parties must be conscious/submit the question of law to the court for a ruling)
 The Court must give full consideration to the Question of Law
 THe resolution of the Question of law must be essential to the reasoning behind
the decision of the Court (i.e. it cannot be a hypothetical question/not strictly
relevant to the resolution of the dispute)
Obiter dicta (remarks in passing): pronouncement of a legal principle that is not strictly relevant
to deciding the case
o Not ratio – see Woolmington v DPP [1935] AC 462
16
o Mere restatement of an existing settled principle of law
Statutory Interpretation
Statutory interpretation is the process of ascertaining the meaning of words/phrases used in legislation.
 Spiegelman CJ, of the Supreme Court of NSW: the law of statutory interpretation has become the
most important single aspect of legal practice. Significant areas of the law are determined
entirely by statute. No area of the law has escaped modification.
Statutory interpretation are:
1. Legislative Rules
a. Acts Interpretation Act 1901 (Cth)
i. S15A: Legislation is read subject to the Constitution
ii. S15AA: Meaning that promotes the purpose or object of the Act is preferred
iii. S15AB: Extrinsic material may be used to assist in confirming meaning
iv. S15AC: Mere changes of style do not carry different meaning
2. Common Law Rules
a. Literal Rule: provision interpreted according to the ‘ordinary and natural sense’ of the
words used – Higgins J in Engineers’ Case (1920) 28 CLR 129
b. Golden Rule: ‘the grammatical and ordinary sense of the words is to be adhered to,
unless that would lead to some absurdity, or some repugnance or inconsistency with the
rest of the instrument, in which case the grammatical and ordinary sense of the words
may be modified, so as to avoid that absurdity and inconsistency, but no farther’ – Grey
v Pearson (1857) 6 HL Cas 61 per Lord Wensleydale
c. Mischief Rule: provides an examination of the former law to deduce parliament’s
intention (the rule in Heydon’s Case)
i. What was the common law before making the Act?
ii. What was the mischief and defect for which the CL did not provide?
iii. What remedy has the Parliament decided on to remedy this defect?
iv. The rule then is for the judge to make such construction as supresses the
mischief and advances the remedy
Traditional vs. Modern Approach to Statutory Interpretation
Traditional Approach
 Strict literal
approach
(FCT v
Westraders
Pty Ltd 80
ATC 4357)
Modern Approach
 An approach to construction that promotes the purpose/object of
the statute, i.e. ‘purposive approach’ which requires courts to have
regard to broader context of the legislation from the outset, not just
when ambiguity arises (CIC Insurance Ltd v Bankstown Football Club
(1997) 187 CLR 384)
 Determine the purpose of parliament in passing the legislation and
adopt an interpretation that is consistent with that purpose
Further Guidance:






Defined Terms – S 6 ITAA36 / s995-1 ITAA97
In ITAA97, defined/technical words are marked with an asterisk *
Noscitur a sociis – a word/phrase should take its meaning from associated/accompanying
words/phrases
‘means’ (exhaustive) vs. ‘includes’ (leaves open)
‘and’ (cumulative) vs. ‘or’ (alternative)
Where there is conflict between a general provision and a more specific provision, the more
specific provision will prevail
17
Tutorial Questions
1. Outline the steps involved in calculating income tax payable. In your answer, make sure you
refer to relevant key legislative provisions.
Summary of steps in calculating income tax payable/refundable
Step 1: Calculate taxpayer’s taxable income for the income year (4-15)
Step 2: Calculate the basic income tax liability on the taxable income according to applicable tax rates (
Step 3: Calculate taxpayer’s tax offsets for the income year
Step 4: Subtract tax offsets from basic income liability. The result is how much income tax is payable for
the financial year
Step 5: Credit is given for tax withheld by employer during the year
Step 6: Levies, charges and surcharges may then need to be added
2. Give an example of a current Australian tax offset and outline the relevant eligibility
requirements.
a. Tax offsets are sometimes called ‘rebates’ or ‘credits’ which are subtracted from Basic
Income Tax Liability
b. An example is low income tax offset (ITAA 97 s207-20(2)
c. This is only available to resident individual taxpayers whose taxable income is less than
$66,667. For 2017/18 – the maximum low income offset is $445, and this amount is
reduced by 1.5c for every dollar that the person’s taxable income exceeds $37,000
3. Why is a tax offset more favourable to a taxpayer than a deduction?
a. An offset is a direct reduction in tax owed – reducing your tax bill dollar for dollar.
Offsets can reduce tax payable to zero – so if your tax offsets are greater than your tax
due, you do not get a refund of the excess amount with exceptions = more favourable.
b. A deduction is a reduction in your taxable income, it is not a decrease in tax owed. So, it
will reduce the tax owed only by a %, and so the benefit may be substantially smaller
than the equivalent offset relative to the income earned. Deductions have to relate very
closely to your income and there are many rules and regulations around the
deductibility – they are only taken off your income BEFORE tax is worked out.
4. Do you think the Government should use tax expenditures such as tax offsets to influence
social outcomes? Why or why not?
a. Choose one type of tax offset and discuss
b. Eg. Low income offset: why does the government have this, and why? Possibility
someone will increase deductions that they did not incur, so they will get more back.
c. Depending on who is using it, they will get a certain side effect.
5. What are the relevant tests applicable regarding the concept of ‘residence’ for tax purposes?
a. Definition (for tax purposes) s 995-1 ITAA97, s 6(1) ITTA 36
b. Individuals: 4 alternative tests:
i. The person resides in Australia
ii. The person’s domicile is in Australia, unless the Commissioner is satisfied that
their permanent place of abode is outside Australia
iii. 183-day test
iv. Commonwealth superannuation test
c. Companies: 3 tests
i. If company is incorporated in Australia
ii. If it ‘carries on business in Australia’ and has ‘its central management and
control in Australia’
iii. If it ‘carries on business in Australia’ and has its ‘voting power controlled by
shareholders who are residents of Australia’
6. How does income tax treatment differ for residents vs foreign residents?
a. Resident Individual Rates apply to resident individual taxpayers (a person is treated as a
resident if they are a resident at any time during the income year, or in receipt of certain
social security benefits). An individual who is a resident for all of the income year is
18
entitled to the tax-free threshold (but if they are only a resident for part of the year,
they are only entitled to part of the tax-free threshold)
b. Foreign Resident Individual Rates apply to a ‘prescribed non-resident taxpayer’ (ie, a
person who at all times during the income year is a non-resident. If they are a resident
for at least one day, resident rates will apply, s3(1) Income Tax Rates Act 1986 Cth).
Prescribed non-resident taxpayers are not entitled to the tax-free threshold, and are not
liable to Medicare Levy or Medicare Levy Surcharge.
c. Taxable income = assessable income. Regarding the steps to calculate:
i. Foreign residents only pay tax based on the income they earned in Australia
ii. Rate will be different for foreign residents
iii. Offsets not available for foreign residents
iv. Foreigners are affected by this
v. No big difference
vi. Foreign residents do not pay medicare Levy
Question 1
Law graduate Sarah was working for a top-tier law firm in Sydney, where she lived with her parents,
when she was offered the opportunity to work overseas in the firm’s Paris office for a period of two years
or more. Sarah moved to Paris and worked very hard in the firm’s Paris office. She obtained a visa to
work in Paris because she did not know whether she would stay in Paris for longer than two years. She
leased an apartment in Paris and enrolled in a French cooking class which she attended fortnightly on
weekends. After two years of working in Paris, Sarah took 12 months of unpaid leave so that she could
travel around the world on a hot air balloon tour. Prior to the tour, Sarah shipped a box of dresses that
she had purchased during her time in Paris to her parents’ address in Sydney. Sarah planned to return to
Sydney at the end of the tour and lease an apartment for herself in Pott’s Point close to work.
Was Sarah an Australian resident for tax purposes during her absence from Australia? Make sure you
apply the HIRAC methodology and refer to any relevant cases, legislation and tax rulings in your
answer.
Heading/Issue: Was Sarah an Australian resident for tax purposes during her absence in Australia?
Rule: s 995-1 ITAA97, s 6(1) ITTA 36, there are 4 tests:
1. The person resides in Australia
2. The person’s domicile is in Australia, unless the Commissioner is satisfied that their permanent
place of abode is outside Australia
3. 183-day test
4. Commonwealth superannuation test
Application:
1. Applying TR 98/17
a. Her intention or purpose: was to work in Paris
b. Her family reside in Australia and she was living in Australia, but she was then not a
resident of Australia – and had sent all her clothing back to Australia that she had
purchased overseas – she planned to return
2. Relevant case: FCT v Applegate. Apply to facts to ratio of the case = does not mean
permanent/for the rest of your life. Also refer to IT 2650.
a. Intended and actual length of individual’s stay: 2 years
b. She did not intend to return to Australia after Paris
c. She did establish a home outside of Australia – she rented out an apartment
d. Abandonment of any residence/place of abode: she had moved out of her parent’s
place, but upon her return she wanted to move to a new apartment
e.
Conclusion:
Based on the domicile test, she was an Australian resident even when she was travelling.
19
Consider the following additional facts:
Upon returning to Australia, Sarah takes up a lease of an apartment in Pott’s Point and obtains private
health insurance. Sarah is subsequently promoted to the position of Senior Associate at the law firm as
her boss is very impressed with her Paris work experience. Sarah’s taxable income in the 2017/18 year of
income is $200,000 (during which period she is working in Australia as a Senior Associate). $57,876 tax is
withheld by her employer during the year and remitted to the ATO.
Calculate the income tax payable by Sarah for the 2017/18 year of income (assuming she is a single
resident taxpayer with no dependants) given the above facts.
Using the table (ON ATO WEBSITE)
Step 1
LESS
Step 2
Assessable income
Deduction
Taxable income
BITL
Step 3 and 4
200,000
0
200,000
54,232 + (200,000-180,000)*0.45 =
63,232
0
LESS
Low income tax offset
LESS
Franking credit
Step 5
LESS
PAYGW
57876
Step 6
ADD
Medicare levy
200,000*2% = 4000
Therefore, tax payable = 63232 – 57876 + 4000 = 9356
** do tax offset first, THEN franking credits = because it is not refundable
Question 2
Stephen is a behavioural economics researcher employed by a prestigious university in the UK. He comes
to Australia to undertake an intensive six-month research project at an Australian university, during
which period the university in the UK continues to pay Stephen his salary. In Australia, Stephen lives in
mediocre accommodation on campus. His wife who continues to live in the UK visits him for 2 weeks
before returning to the UK. At the end of the six month period, Stephen goes back to the UK and
continues working for his university in the UK.
Is Stephen an Australian resident for tax purposes? Make sure you apply the HIRAC methodology and
refer to any relevant cases, legislation and tax rulings in your answer.
Heading/Issue: Was Stephen an Australian resident for tax purposes during his stay in Australia?
Rule: s 995-1 ITAA97, s 6(1) ITTA 36, there are 4 tests:
1. The person resides in Australia
2. The person’s domicile is in Australia, unless the Commissioner is satisfied that their permanent
place of abode is outside Australia
3. 183-day test
4. Commonwealth superannuation test
Application:
Stephen had only resided in Australia for 6 months for a particular research project and did not intend to
stay here. Stephen is employed in the UK, and returned to the UK after the research project and
continued working with his UK employer – he was only here for 6 months and did not establish residence
in Australia.
But, because the question specifically of a TIME PERIOD = 183-day test. Stephen’s usual place of abode is
outside Australia and did not intend to stay in Australia
Conclusion
Stephen is not a resident of Australia for tax purposes.
Question 3
Sam is an accountant who was transferred by his employer to work in Brazil for two years. During this
time, Sam and his wife leased an apartment in Brazil. They let their house in Sydney to tenants and stored
their furniture in a neighbour’s basement in Sydney. Sam anticipated that at the end of the two years he
would move to his employer’s New York office. However, a few weeks prior to the end of the two years,
20
he was offered a promotion in the Sydney office. He subsequently returned to Sydney to take up the
promotion.
Was Sam an Australian resident for tax purposes during the two-year period of his absence from
Australia? Make sure you apply the HIRAC methodology and refer to any relevant cases, legislation and
tax rulings in your answer.
Heading/Issue: Was Sam an Australian resident for tax purposes?
Rule: s 995-1 ITAA97, s 6(1) ITTA 36, there are 4 tests:
1. The person resides in Australia
2. The person’s domicile is in Australia, unless the Commissioner is satisfied that their permanent
place of abode is outside Australia
3. 183-day test
4. Commonwealth superannuation test/
Application:
1. Sam had went to work in Brazil for 2 years. His wife had moved with him and had abandoned
their assets in Sydney – left furniture in neighbour’s basement, rented out their home.
2. He intended to not stay in Australia for over two years, and he had leased an apartment in Brazil.
That is, he had abandoned his residence/place of abode in Australia (FCT v Applegate)
Conclusion:
Sam is not a resident of Australia for tax purposes.
Question 4
OpalCo Ltd is a large company incorporated in Singapore which carries on business mining and selling
opals in Australia. Meetings of the Board of Directors are held at OpalCo’s head office in Sydney, where
most of the directors (including the managing director) live. OpalCo Ltd’s taxable income for the 2016/17
year of income is $12 million. Is OpalCo Ltd an Australian resident for tax purposes during the
2016/2017 year of income? Make sure you apply the HIRAC methodology and refer to any relevant
cases, legislation and tax rulings in your answer.
Heading/Issue: Was OpalCo Ltd an Australian resident for tax purposes?
Rule: for companies, there are 3 rules:
1. If it is incorporated in Australia
2. If the company carries on business in Australia, and has its central management and control in
Australia
3. If the company carries on business in Australia and has voting power controlled by shareholders
who are residents of Australia
Application:
1. The company is incorporated in Singapore
2. The company carries on business in Australia, and has its central management and control in
Australia
3. The company carries on business in Australia and has voting power controlled by shareholders
who, most of them live in Australia but not all
Conclusion:
OpalCo Ltd is not a resident of Australia for tax purposes.
Calculate the income tax payable by OpalCo given the above facts.
= 12,000,000 x 0.3 = $3,600,000 (for 2016, aggregated turnover was less than $10m = N/A)
Question 5
Calculate the income tax payable by Tom, a single resident taxpayer (with no dependants), for the
2016/17 year of income given the following facts:
Assessable income $50,000,
Allowable deductions $10,000
Step 1
Assessable income
50,000
LESS
Deduction
10,000
Taxable income
40,000
21
Step 2
BITL
Step 3 and 4
LESS
Low income tax offset
LESS
Franking credit
Step 5
LESS
PAYGW
Step 6
ADD
Medicare levy
Therefore, tax payable = 4547 – 400 + 800 = 4947
3,572 + (40,000 – 37,000) x 0.325 =
4547
445 - (40,000 – 37,000) * 0.015 =
400
0
0
40,000 *2% = 800
Question 6
Calculate the income tax payable by Frank, a single Australian resident shareholder, for the 2016/17
year of income given the following facts: (Ignore Medicare Levy)
Other taxable income $90,000
Dividend $6,400
Franking credits $2,743
Step 1
Assessable income
LESS
Deduction
Taxable income
90,000 + 6400 + 2743 = 99,143
Step 2
BITL
19,882 + (99,143 – 87,000) x 0.37 =
24,314.91
Step 3 and 4
LESS
Low income tax offset
0
LESS
Franking credit
2,743
Step 5
LESS
PAYGW
0
Step 6
ADD
Medicare levy
0
Therefore, tax payable = 24,314.91 – 2743 = 21571.91
Question 7
Emily arrives in Australia on 1 January 2017 from Germany, to take up permanent residence. She spends
several months visiting relatives and sightseeing around Sydney, visiting Sydney Opera House,
Centrepoint Tower and Taronga Zoo, before commencing work at an engineering firm on 1 March 2017.
From 1 March 2017 to 30 June 2017 Emily earns $50,000.
What is the relevant tax-free threshold applicable to Emily for the 2016/17 year of income?
Part tax-free threshold = 13,464 + (4,736 x # of months in the year the individual is a resident)/12months
She resided in Australia the day she arrived and had an intention to stay.
= 13,646 + (4,736 x 6)/12
= 15,832
Question 8
Charles is a foreign resident who has a taxable income of $200,000 for the 2016/17 year of income,
comprising $100,000 from providing services in Australia, $50,000 from rental income from his
waterfront property in Mosman and $50,000 from rental income from a property in Hong Kong.
Calculate the income tax payable by Charles for the 2016/17 year of income given the above facts.
Only pays tax on Australian sourced income:
Step 1
Assessable income
150,000
LESS
Deduction
Taxable income
Step 2
BITL
28,275 + (150,000 – 87,000) x 0.37
= 51,585
Step 3 and 4
LESS
Low income tax offset
0
LESS
Franking credit
0
Step 5
LESS
PAYGW
0
Step 6
ADD
Medicare levy
0
Therefore, tax payable = 51,585
22
Types of Income, Ordinary and Statutory
Ordinary Income



S6-5 Ordinary income
Generally most income which comes in to a taxpayer is ordinary income
Judicial concept – case law – income according to ordinary concepts
‘The word ‘income’ is not a term of art, and what principles are to be applied to ascertain how much of
those receipts ought to be treated as income, must be determined in accordance with the ordinary
concepts and usages of mankind’.
Scott v CT (1935) 35 SR (NSW) 215
Compare:
- economic concept (Haig-Simons) = Income = consumption + savings
- accounting concept P+L account represented by revenue minus expenses
Other Types of Income – ITAA 97
What is assessable income? (NOTE: we will focus on this, assessable income is relevant for the tax
formula)
 S 6-5 Ordinary Income
 S 6-10 Statutory income
What is NOT assessable income? (NOTE: this is NOT included in assessable income)
 S 6-20 Exempt income
 S 6-23 Non-assessable non-exempt income (NANE)
S 6-25 Reconciliation Rules: where an amount may be included in the taxpayer’s assessable income as
either ordinary income or statutory income, use the statutory income provision (no double taxation)
Doctrine of Constructive Receipt
Applies to both ordinary and statutory income
 ITAA 97 s 6-5 and 6-10(3): an amount that has been earned by an individual may be their
ordinary income even if it is paid to another entity rather than to the individual or if it is dealt
with, or on behalf of the individual in another way
Characterisation process
Is the amount ordinary income? The judicial concept applies. Process of ‘characterisation’:
 Look at the whole of the circumstances
 No single element is necessarily determinative
 The amount does not need to possess all of the characteristics
We will now explore the characteristics of ordinary income, by reference to the 15 Parson’s Propositions,
developed by Professor R W Parsons in ‘Income Taxation in Australia, Principles of Income, Deductibility
and Tax Accounting’. NOTE: This is simply another way of summarising the characteristics of ordinary
income.
Parson’s Propositions
Overview:
1. An item of an income character is derived when it has ‘come-home’ to the taxpayer. The
presence of illegality, immortality or ultra vires does not preclude derivation
23
2. An item of an income character that has been derived will be income in the amount of its
realisable value
3. The character of an item as income must be judged in the circumstances of its derivation by the
taxpayer, and without regard to the character it would have had if it had been derived by
another person
4. To have the character of income an item must be a gain by the taxpayer who derived it
5. There is no gain unless an item is derived by the taxpayer beneficially
6. There is no gain if an item is derived by the taxpayer from himself: the principle of mutuality
7. There is no gain if an item is derived by the taxpayer as a contribution to capital
8. A gain which is a mere gift does not have the character of income
9. A mere windfall gain does not have the character of income
10. A capital gain does not have the character of income
11. A gain which is one of a number derived periodically has the character of income
12. A gain derived from property has the character of income
13. A gain which is a reward for services rendered or to be rendered has the character of income
14. A gain which arises from an act done in carrying on a business, or from the carrying out of an
isolated business venture, has the character of income
15. A gain which is compensation for an item that would have had the character of income had it
been derived, or for an item that has the character of a cost of deriving income, has itself the
character of income
Each proposition is now discussed by reference to relevant examples from case law, however, note that
these references are not exhaustive, and a case may be relevant to more than one of the propositions
Parson’s Propositions 1 + 2
 Must ‘come in’ to the taxpayer, must be ‘derived’, ‘realised’ (accrual vs cash accounting basis)
Tennant v Smith [1892] AC 150
The value of free accommodation provided to bank employee (prohibited from subletting) was not
income
‘[Income Tax] is a tax on what comes in … on actual receipts … a person is chargeable for income tax …
not on what saves his pocket, but on what goes into his pocket’
Cooke & Shereden 80 ATC 4140
Facts: Taxpayers (soft drink sellers) were given free holidays by soft drink manufacturer. Holidays were
non-transferable and cannot be converted into cash.
Held: taxpayers would have to spend money if they wanted to provide the holiday for themselves = not
ordinary income – provided as part of sales incentive scheme, not income
 BUT note Legislative Response – s 21A ITAA36 ‘non cash business benefits’ may be treated as if
they are convertible into cash (Note also s 23L(2))
 Unrealised gains are NOT income – must be an amount that the recipient is entitled to
o Compare economic concept: but NOTE that a gain on discharge of liabilities may be
income
FCT v Unilever Australia Securities Ltd 95 ATC 4117
Facts: Finance company entered arrangement – paid 3rd party an amount in return for 3rd party agreeing
to take over the finance company’s obligation to repay loan principals in the future.
Held: difference between amount paid and face value of loans to be repaid = revenue gain to company
o International Nickel Australia v FCT (1977) 137 CLR 347
 Foreign currency gain was assessable income
 Illegality/immortality etc is irrelevant
o Partridge v Mallandaine (1856) 2 TC 179 (‘business’ of burglary)
o Lindsay v IRC (1993) 18 TC 43 (whisky smuggling when alcohol was banned)
o No 275 v MNR (1955) 13 Can Tax ABC 279 (prostitution)
24
Parson’s Proposition 3
 Is the amount income to this taxpayer?
FCT v McNeil (2007) ATC 4223: Shareholder received $576.64 from participation in share buy-back share
scheme. Court looked at character of the amount in the hands of the taxpayer (i.e. the shareholder – not
the nature of the bank’s capital reduction) and held that this was ordinary income to the shareholder
Federal Coke Co Pty Ltd v FCT (1977) 34 FLR 375:
Facts: Federal Coke was subsidiary of Bellambi (parent company). Bellambi had a contract to supply coke
to Le Nickel. Le Nickel was unable to accept the full amount of coke originally contracted for, Le Nickel
negotiated with Bellambi, and paid compensation to Federal Coke.
Held: in the hands of Federal Coke (not a part to the contract), the compensation was a gift.
NOTE: Doctrine of Constructive Receipt was not taken into account in the case. If it had been, the result
may have been different.
Parson’s Proposition 4
Hochstrasser v Mayes [1960] AC 376
Facts: Employer company set up scheme to compensate employees for any loss made on sale of their
home when being relocated for work.
Held: Amount received by employee under the scheme was not assessable – no gain.
Parson’s Proposition 5
Countess of Bective v FCT 47 CLR 417
Amounts paid to Countess under a trust for the benefit of her daughter (not for the benefit of Countess)
NOTE: modern approach to child support payments s51-50 ITAA97
Zobory v CT (1995) 64 FCR 86; 95 ATC 4251
Employee earned interest on money that he stole from his employer. The interested was NOT assessable
income because he was not beneficially entitled to it and the funds were held on constructive trust for
his employer.
Parson’s Proposition 6
Income must ‘come in’ from outside sources, i.e. taxpayers cannot derive income from dealing with
themselves.
The Bohemians Club v FCT (1918) 24 CLR 334
Subscriptions to clubs/associations by their members (where members are entitled to participate in any
surplus)
Parson’s Proposition 7
Foley v Fletcher (1858) 157 ER 678
Instalments of purchase price of capital asset (land)
Parson’s Proposition 8
Hayes v FCT (1956) 96 CLR 47
Facts: Taxpayer employed by R until the business was incorporated and R gave up management of
business. Taxpayer then employed by company and issued shares with company. When company failed
to trade successfully, R took control if all issued shares were transferred to him. Taxpayer reluctantly did
so. R then gave gifts of shares to taxpayer.
Held: it was a gift, NOT income from personal exertion – taxpayer had already been fully remunerated for
work done for R and for company.
Scott v FCT (1966) 117 CLR 514
25
Facts: Taxpayer was a solicitor who had, over a period of years, performed various legal services for a
widow. The solicitor had previously acted for her husband (before his death) and a personal friendship
developed between solicitor and widow. Widow made a gift of 10,000 pounds to the solicitor –
appreciation o his friendship rather than for any legal services performed.
Solicitor received 10,000 pounds from longstanding client’s wife out of husband’s estate
Held: it was a gift, NOT income from personal exertion
Factors considered: ‘An unsolicited gift does not … become part of the income of the recipient merely
because generosity was inspired by goodwill and goodwill can be traced to gratitude by some service
rendered … the relation between the gift and the taxpayer’s activities must be such that the receipt is in a
relevant sense a product of them’
Windeyer J: The connection between the 10,000 pounds gift and the provision of services as Mrs
Freestone’s solicitor was too indirect for the gift to be regarded as a product or incident of the
employment relationship. 10,000 pounds was a huge sum at the time and completely out of proportion
to services rendered so not a bonus. The taxpayer had already been fully remunerated. The gift was
unsolicited. Made with a range of other gifts.
Parson’s Proposition 9
Gambling/lottery winnings are not income (unless taxpayer is carrying on a business of gambling, very
rare – compare USA approach
 Taxation Ruling IT 167
Parson’s Proposition 10
Income = fruit, capital = tree
Eisner v Macomber 252 US 189 (1920)
‘The fundamental relation of ‘capital’ to ‘income’ has been much discussed by economists, the former
being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir
supplied from springs, the latter as the outlet stream to be measured by its flow during a period of time’.
Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337
‘distinction between the business entity structure or organisation set up or established for the earning of
profit and the process by which the organisation operates’
- Return generated from the exploitation/use of capital asset or ordinary operation of the business is
generally income
- Gain from realisation/loss/destruction of a capital asset is generally capital in nature, NOT income
Parson’s Proposition 11
Consider ‘recurrence regularity and periodicity’ and recipient’s reasonable reliance on receiving the
amount
FCT v Dixon (1952) 86 CLR 540
Facts: Taxpayer’s employer sent circular to staff during WWII advising that any staff who enlisted in
defence forces would be paid amounts to make up the difference between present wage rate and that
from military. Employer was under no legal obligation to make payments – employee did not return to te
employer and employer did not promise re-employment. Taxpayer received payments from former
employer.
Held: Payments were ordinary income.
Dixon CJ and Williams J: payments were incidental, regardless of source to the taxpayer’s employment or
service as a soldier.
Fullagar J: payments took character of what they replaced, as salary and wages from former employer.
Keily v FCT 83 ATC 4248:
Facts: Taxpayer was a pensioner who received an aged pension under the Social Security Act. The
Commissioner assessed the aged pension on the regularity and recurrence doctrine. The Court agreed,
26
White J stated that in the case of aged pensions the generally accepted characteristics of income
recurrence and periodicity are all present and an expectation that it is used as an income substitute.
Distinguish windfall amounts received infrequently and unexpectedly (FCT v Harris 80 ATC 4238)
Facts: Taxpayer previously employed by bank and receiving pension from bank’s superannuation fund.
Fund made voluntary payment of $4450 to the taxpayer and other employees out of concern for inflation
on their pensions.
Held: not ordinary income – payments were not a product of past services rendered to the bank since
taxpayer was already fully remunerated for those services.
Distinguish instalments received for the sale of a capital asset (Foley v Fletcher (1858) 157 ER 678)
Further Parson’s Propositions
NOTE: in relation to PP’s 12, 13, 14, 15 – ppt slides
Income from Personal Exertion
Background – s 6(1), ITAA 36
income from personal exertion or income derived from personal exertion means income consisting of
earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring
allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in
relation to any services rendered, the proceeds of any business carried on by the taxpayer either alone or
as a partner with any other person, any amount received as a bounty or subsidy in carrying on a business,
any amount that is included in the assessable income of the taxpayer by reason of section 393-10 of the
ITAA97, the income from any property where that income forms part of the emoluments of any office or
employment of profit held by the taxpayer, and any profit arising from the sale by the taxpayer of any
property acquired by the taxpayer for the purpose of profit-making by sale or from the carrying on or
carrying out of any profit-making undertaking or scheme, but does not include:
(a) interest, unless the taxpayer's principal business consists of the lending of money, or unless the
interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by
the taxpayer in the course of the taxpayer's business; or
(b) rents, dividends or non-share dividends.
S6(1) ITAA36 definition is inclusive and merely provides examples of income from personal exertion, it is
inadequate, therefore we must look at general principles from the case law...
General Principles
There must be a sufficient connection between the amount/benefit received, and personal exertion
The amount/benefit received is a reward/product of personal exertion
 Employment relationship/business is not necessary
 Personal exertion = personal effort (eg. providing a service)
 Salary/wages are income from personal exertion
Reward for services
Brent v FCT
Facts: Taxpayer, wife of train robber granted media company exclusive right to publish her life story.
Court held that the amounts she received for making herself available for a series of interviews were a
reward for services, ie income from personal exertion.
Held: Characterised payment as being for services rendered, namely the making of herself available for
interview by journalists , the communication of her story to the journalists and signing of a manuscript
prepared by the journalists. Distinguished from a sale of property, remuneration from employment
Dean v FCT –
27
Retention payments made in consideration of key employees agreeing to remain employed for 12 mths
following takeover were held to be income
Voluntary Payments may be income provided that there is a sufficient connection with taxpayer’s
income-earning activities
Calvert v Wainwright (1947) 27 TC 475– tips received by taxi driver were held to be income as the tips
were an ordinary incident of the taxi driver’s income-earning activities
FCT v Dixon (1952) 86 CLR 540
Facts: The taxpayer was a clerk who enlisted in the armed forces in WWII.The employer agreed to pay
any shortfall in wages to those who enlisted. The Commissioner assessed the supplementary payment as
income. The High Court held that the payments were income according to ordinary concepts.
Dixon CJ and Williams J: This was an expected periodical payment arising out of circumstances which
attended the war service and which had the character of income even though paid by someone other
than the armed services. They were in substitution for lost earnings.
FCT v Harris 80 ATC 4238– Taxpayer received periodic but unpredictable/unsolicited lump sums from
former employer as supplement to pension where payments were unrelated to length/quality of service.
The payments were not income.
Personal gifts are NOT income (see above Scott v FCT (1966) 117 CLR 514)
Prizes


Generally, a mere prize is not income (Moore v Griffiths [1972] 3 All ER 399)
However it may be income if there is a sufficient connection with the taxpayer’s income-earning
activities
Kelly v FCT 85 ATC 4283
Facts: Professional footballer received monetary award from Channel 7 for ‘best and fairest player’.
Held: The amount was income as
a) There was a sufficient nexus between award and footballer’s employment
b) Related to his exercise of skill and ability incidental to his work
c) his employment facilitated the payment and rendered him eligible to receive the payment
FCT v Stone 2005 ATC 4234 - Mrs Stone was a policewoman and javelin thrower who made around
$39,000 in salary plus over $180,000 in endorsements and prize money, she was found to be carrying on
business as a professional athlete and the money was income.
Payments for relinquishing/restricting/giving up rights are NOT ordinary income (Note: in further lectures
we will look at CGT Event D1)
 Where an amount is received for giving up valuable rights, it will be capital and NOT income from
personal exertion
o Eg, payment received for agreeing not to do something
Jarrold v Boustead (1964) 41 TC 701
Facts: Taxpayer was an amateur rugby player who received a signing-on fee to play as a professional for a
rugby league club. The fee was characterised as being compensation for giving up the taxpayer’s amateur
status, regarding as a permanent advantage (allowing footballer to represent country internationally).
Held: was NOT ordinary income – fee was not paid in return for services to be rendered by player to club
making payment and was a non-taxable capital receipt
Pritchard v Arundale[1972] Ch 229Facts: Taxpayer was a senior partner in an accountancy firm. One client offered him a senior
management position = reluctant to accept as his currently established position would be given up. Client
arranged for taxpayer to be issued shares in related company to induce him to accept offer.
28
Held: Inducement was NOT ordinary income – it was compensation for the loss of status involved in
giving up his position in private practice = so was capital receipt, NOT an advance payment for services
rendered.
Higgs v Olivier [1951] Ch 899
Facts: Lump sum paid to actor who undertook not to produce, direct or act in any other films for 18
months
Held: NOT ordinary income – was capital, paid to actor because he gave up the right to earn income as an
actor during specified period
Dickenson v FCT (1958) 98 CLR 460- amounts paid to a petrol station proprietor to sell only Shell products
for the next 10 years from that petrol station and for the next five years to sell only Shell products within
a 5 mile radius, were capital amounts NOT ordinary income
S 15-2, ITAA97



s15-2, ITAA97includes in the assessable income of the taxpayer, the value to the taxpayer of any
allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer
in respect of or for or in relation directly or indirectly to, any employment of or services
rendered by the taxpayer.
May apply to both cash and non-cash benefits
Limited application s15-2(3) exclusions such as ordinary income, dividends, fringe benefits
Income from Business + Compensation Receipts
General Principles
Normal proceeds of business = income from business = ordinary income
If the amount is not within the normal proceeds of business:
 Is it an “isolated business transaction”?
o FCT v Whitfords Beach
 Is it an “extraordinary transaction”?
o FCT v The Myer Emporium Ltd 87 ATC 4363
Is the taxpayer carrying on a business, or merely a hobby?




“Badges of Business”
Profit-making purpose
o Eg. conducting research into proposed activity, consulting experts or receiving advice on
the running of activity, likely profitability before setting up the business
o A mere ‘fond hope’ (Case V138) or ‘self-delusion’ (Brajkovich v FCT) may not be enough
o Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
o Even if profits are expected, even though there is a slim change: VBF v FCT [2005]
Systematic/organised
o A business normally organises its trading activities as efficiently as possible, in order to
maximise profits
o Even on a very small scale: Ferguson v FCT (starting to build up a herd while still in the
navy, leased 5 cows for 4 years with the cattle pastured and bred by a management
company)
o Even if it is not successful: FCT v JR Walker (taxpayer was beginning business of goat
breeding in a ‘businesslike way’: goat kept in stud farm in another state, cared for by
experts at considerable cost, used as basis of breeding program)
o Thomas v FCT 72 ATC 4094: ‘a man may carry on a business’ even in a small way
Size/scale
o The larger the scale of activity, the more likely the taxpayer is carrying on a business
29
o

The smaller the scale of activities, the more important the other factors are to prove (TR
97/11)
o FCT v JR Walker 85 ATC 4179 (as above)
o If goods are inherently unsuitable for domestic use (such as in large quantities):
Rutledge v IRC (1929) 14 TC 490 (Taxpayer purchased 1m toilet paper rolls and resold
them, could not peruade court that his dealings were merely personal/domestic use)
o Prepared to trade ‘on the open market’ (i.e. with all willing and suitable customers) in
the normal terms and conditions applying on that sort of business
Frequency
o Can have frequent activity (regular transactions) but business can go through quiet
periods
o FCT v Whitfords Beach (case below)
Other matters that need to be considered:
 Illegal transactions do not prevent them constituting a business for taxation purposes (FCT v La
Rosa)
 Where a taxpayer has a main business or employment does not mean they are not conducting
another business (Ferguson v FCT)
 Where a taxpayer does not carry on the relevant activities by free choice but rather because of
the circumstances does not mean they are not in business (Tweddle v FCT)
 The circumstances in which an item is disposed of may affect character of transaction (Case
V113)
Income from business vs. realisation of capital asset
Consider the scope of the business: is the amount income from business or is it from realisation of a
capital asset (ie, capital)?
Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159
‘… where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than
he originally acquired it at, the enhanced price is not profit assessable to Income Tax. But it is …
enhanced values obtained from realisation or conversion of securities may be so assessable where what
is done is not merely a realisation or change of investment but an act done in what is truly the carrying
on, or carrying out of a business…’ [165-166]
 Western Gold Mines Ltd v CT (WA) (1938) 59 CLR 729
Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188:
Held: Mining company was not assessable on a large profit it made when it sold subdivided allotments of
land. The profits were not assessable as ordinary income but were a tax-free capital receipt because the
company had ‘merely taken the necessary steps to realise the land to its best advantage’.
 FCT v Whitfords Beach (1982) 150 CLR 355: severely limited the practical scope of the ‘mere
realisation’ doctrine, and significantly expanded the potential for receipts from isolated
transactions to be caught as ordinary income
 Banking/insurance/investment companies: if profit made on the ‘carrying on’ of the banking
business, it will be assessable as ordinary income. If it is necessary for the purpose of their
business.
o London Australia Investment Co v FCT (1977) 7 ATR 757
 Lease incentive payments: is a payment or benefit provided by the owner of rental premises to
induce businesses to enter into a lease of the premises
FCT v Cooling: a lease incentive payment of $162k made to a firm of solicitors to induce it to change
premises was held to be ordinary income.
1. Where a taxpayer operates from leased premises, the move from one premises to another and the
leasing of the new premises ‘are acts of the taxpayer in the course of its business entity … as trading
activities that give rise to taxpayer’s assessable income’
2. Incentive payment was assessable as ordinary income – as profit-making scheme. Transaction formed
part of business activity and not ‘insignificant purpose of transaction to obtain a commercial pmt’
30
FCT v Montgomery
Facts: Taxpayer (large legal firm) recently completed refurbishing its rented premises when landlord
advised partners that the renovation to remove asbestos would take about 4 years to complete – this
would disrupt their business and be dangerous to staff. So, firm negotiated and signed for new premises.
The lessor paid the service company a lease incentive, which was more than market rent, and a partner in
the firm received a share of the cash lease incentive.
Held: the full amount was assessable as ordinary income to the partners.
- the receipt of the lease incentive payment was ordinary incident of firm’s business activity
- firm used/exploited its capital to get this payment, which was to benefit the firm and di not augment
the firm’s profit-yielding structure
- if a significant purpose of a transaction, even if not the ONLY significant purpose, is profit-making
- cannot distinguish between payment of lease premium by lessee to lessor as an inducement to grant a
lease and a lessee’s receipt of a lease incentive to induce them to take a lease
 Intellectual Property and ‘know-how’: the proceeds of the sale of information will constitute
income at common law if they represent the proceeds or incidents of a business
o For isolated sale of copyright (eg. song), ordinary capital transaction but proceeds of sale
of copyright might be income if songwriting is as aspect or incident of the taxpayer’s
profession or business
Rolls Royce v Jeffrey [1962] 1 All ER 801:
Facts: RR could not manufacture jet engines in certain countries, so it instead entered into 19 agreements
with governments where it supplied the data, drawings and information needed for manufacture by local
companies, train local technicians and provide their own employees to supervise. RR received royalties
and a lump sum payment for the rights granted.
Held: The royalty payment and lump sum payment was ordinary income. RR was ‘using or trading in the
know how in the only/most advantageous way to them’ – RR exploited business opportunities through a
series of transactions and received large sums for its use
Moriarty v Evans Medical Supplies [1957] 3 All ER 718:
Facts: EMS provided Burmese government with confidential information regarding pharmaceutical
products and technical data (drawings, designs, plans) for the Burmese government to manufacture the
pharmaceutical products themselves, and government paid money in return.
Held: This was not assessable due to reduction in profit as a result, where they had agreed to give up the
profit-making base by giving up on that market
S 21, ITAA36
“where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value
of that consideration shall...be deemed to have been paid or given”
‘Non-cash business benefit
 Legislative response to Cooke v Sherden (free holidays were not assessable as ordinary income
because they were not cash or convertible into cash)
o “non-cash business benefit” = property or services provided wholly or partly in respect
of a business relationship
 A “non-cash business benefit” that is not convertible to cash may be treated as if it were
convertible to cash
o If it cannot be convertible into money = not ordinary income but can be taxed in other
ways:
 If provided in return for provision of services = value of benefit included in
recipient’s assessable income under s15-2
 If benefit provided to employees in respect of their employment = FBT and
employees have no tax liability
31

Provided in respect of business relationship = may be deemed convertible into
cash, and recipient of the benefit can be assessable at arm’s length
 s21A does NOT deem the non-cash benefit to be income, it must already be income - benefit
may be brought to account at “arm’s length value”, reduced by any contributions made
o ‘Arm’s length value’ – the amount that the recipient could reasonably be expected to
have been required to pay to get the benefit from the provider if the parties were
dealing with each other at arm’s length
o If cannot be determined, it will be what the Commissioner considers reasonable
(s21A(5))
 Benefit may be exempt income: if taxpayer derives income consisting of non-cash business
benefits in a year and the total amount applicable under s21A does not exceed $300
Tennant v Smith: bank employee was required as part of his duties to occupy a bank house and for that
purpose only – could not be assessed on yearly value of rent-free residence
Heaton v Bell: employee was given the free hire of a car and if he surrendered the free hire, he would
become entitled to a higher wage. This was treated as convertible into cash.
Isolated Business Transaction [6-430] Whitfords Beach
FCT v Whitfords Beach (1982) 150 CLR 355
Facts: Taxpayer was a company (formed by fishermen) which had acquired land to provide fishermen
with access to fishing shacks on the beach. Land value subsequently increased. Developers bought shares
in the company (ie, change of control), and had the company develop/subdivide and sell the land.
Held: Court found that following the change of control, the company had ventured into a land
development business. Taxpayer was assessed on the profit – proceeds of an isolated or one-off
transaction entered into by a business may be taxed as ordinary income
Extraordinary Transaction [6-440] Myer Emporium
FCT v The Myer Emporium Ltd 87 ATC 4363
Proceeds of unusual or extraordinary transactions entered into by a business may be taxed as ordinary
income
1st strand of Myer: even extraordinary transactions (i.e. not of a type that the taxpayer engaged in
regularly in the course of its business operations) can generate assessable income.
2nd strand of Myer: concerns the conversion of an income stream into a lump sum. The High Court’s
finding that the lump sum takes on the character of the income stream which it replaces.
Westfield Ltd v FCT 91 ATC 4234
Facts: Taxpayer’s main activity was design, construction, letting and management of shopping centres.
The taxpayer acquired land for $450k – originally taking an option for purpose of itself establishing and
shopping centre and then, taking a further option to block development be a rival. Taxpayer ultimately
sold land to AMP for $735k if AMP employed taxpayer to design and construct shopping centre that AMP
would build.
Held: Profit was not assessable. Hill K: Myer doctrine did not mean that every profit made by taxpayer in
business activities is of income nature. A mere temporal link is insufficient.
For the first limb:
- where the transaction which generates the profit is ‘not an activity in the ordinary course of business, or
an ordinary incident of some other business’, profit will not be assessable as ordinary income unless the
transaction was ‘commercial’ and at the time was a transaction the taxpayer intended to profit on
- purpose of profit making must exist in relation to the particular operation which gives rise to the profit,
and is the only way the profit is made
- while a profit-making scheme may ‘lack specificity of detail’, (not specifically determined), the profit will
be assessed provided the mode of achieving it was contemplated by the taxpayer as one of the
alternatives in which profit can be made
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The Compensation principle


Applies to amounts received as compensation payments
The compensation payment takes the same character (eg, income or capital) as the amount
which it replaces
o A compensation payment that replaces an amount that would have been ordinary
income is assessable as ordinary income
 What is it replacing/substituting/compensation for? See if it is fundamental
o Look at the business as a whole – if the compensation will affect the business structure
California Oil Products (1934) 52 CLR 28:
Facts: Taxpayer appointed as exclusive distributor and agent in a particular area for an oil company’s
products. Agreement was to run for 5 years and agency was taxpayer’s only business. When taxpayer
agreed to cancel agreement, whole business ceased and went into liquidation.
Held: Compensation payment received was characterised as a capital receipt, even though it was paid by
10 half-yearly instalments
Allied Mills Industries Pty Ltd:
Facts: There were numerous divisions – AM had sole rights to distribute through Groceries and Packaging
Division, biscuits in Australia. Then Arnotts took over to sell the biscuits and gave AM an option to
acquire rights to manufacture certain biscuits – though this was not taken up. Arnotts terminated AM’s
distribution rights and AM agreed in return for a lump sum payment.
Held: it was assessable income to AM
- It was the impact of the termination on AM as a whole which was crucial
- From perspective of AM, the termination did not have fundamental structural consequences: AM was
not parting with a substantial part of its business or ceasing their business
- The key to characterising such payments is the ‘nature of the contract that generates the payment, and
the way in which that contract related to the structure and business of the taxpayer’.
 Claim for damages by corporation for defamation is claim for injury to business reputation and
not assessable: Sydney Refractive Surgery Centre
 Compensation received for cancellation off ordinary business contracts may be income in hands
of recipient: Short bros Ltd v IR Commrs
 Compensation for loss of trading stock (being a revenue asset) is inherently income character:
FCT v Wade
 Compensation for cancellation of an agreement affecting the fundamental structure of a
business (Van den Berghs Ltd v Clark) or for the permanent loss of a fixed asset (Union Fireclay
Co ltd v IR Commrs) is capital in character = NOT INCOME
 Compensation for loss of wages
Income from Property
Note: s6(1) ITAA36: ‘income from property or income derived from property means all income not being
income from personal exertion’.
Interest


Reference to common law: price of money which is borrowed
Usually included in a taxpayer’s assessable income on a cash basis (received by, applied for the
benefit of, the taxpayer)
Riches v Westminster Bank Ltd [1947] AC 390:
“a payment which becomes due because the creditor has not had his money at the due date. It may be
regarded either as representing the profit he might have had if he had had the use of the money, or
conversely the loss he suffered because he had not that use. The general idea is that he is entitled to
compensation for the deprivation.”
Interest is ordinary income
“Premiums” are different (Lomax v Peter Dixon [1943] KB 671)
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Rent





Rent is price paid for right to use another person’s property: eg. land, building, equipment, etc.
(United Scientific Holdings ltd v Burnley Borough Council [1978])
Rent is ordinary income
Different from ‘Rent Premiums’
o Premium: amount paid by a hopeful tenant to induce the landlord to grant the premises
to that tenant
o Premiums are generally capital: since lump sum is linked to access to (rather than use of)
the premises
It is the reality or substance of the matter, rather than the label given by the parties to the
transactions: Ex parte Lathouras; Re Vendardos
Where rental income is received under a non-commercial or domestic arrangement, amounts
paid for board would not generally give rise to the derivation of assessable income: TR IT 2167
Annuities
Annuity = a specified amount paid at specified intervals for a fixed or contingent period = income
We will look at non-superannuation annuities .
Tax treatment depends on whether the annuity has been purchased:
1) If the annuity has not been purchased, the entire amount of the annuity is assessable
2) Purchased annuities (most common) – usually involves paying a lump sum to an insurance
company in return for receiving a regular payment calculated according to your life expectancy
eg, paying $100,000 and receiving $10,000 per annum for life
s27H ITAA36 formula excludes purchaser’s contribution (ie, for fairness only part of the annuity is
assessable) – to avoid taxing the taxpayer’s own capital, an exclusion is provided for the proportion of
each purchased annuity payment that represents a return of that part of the capital investment for which
the annuitant has no obtained a tax deduction
A(B-C) = “Deductible Amount”
D
A = proportion of the annuity to which the taxpayer is entitled in the year of income (if entitled for all of
annuity, A=1, or if only ¾, A = ¾.
B = ‘undeducted purchase price’ – contributions and payments made to purchase the pension of annuity
but not including contributions or payments made by, or on behalf of an employer.
C = the residual capital value of the annuity or pension (i.e. any capital amount payable on termination of
the annuity or pension
D = the relevant number: number of years annuity is stated to be payable, life expectancy of a person, or
whatever numer the Commissioner considers appropriate
Purchased Annuities – Example
Jack pays $100,000 and is paid $10,000 per annum for life. Jack’s assumed life expectancy is 15 years.
An annuity is different from:
 instalments of a purchase price of a capital asset (Foley v Fletcher (1858) 157 ER 678); or
34

a capital sum together with interest.
How to distinguish?
 Where a series of amounts is received by a taxpayer, it may be arguable in some cases that they
could be either annuity payments or instalments of the agreed capital amount from the disposal
of property. If instalments of capital = can be tax free is relate to assets acquired before GST, or
taxpayer entitled to GST discount
 Legal form approach: Can a “Fixed Gross Sum” (a definite price) be identified? This is merely a
guideline, and not conclusive
Egerton-Warburton (1934) 51 CLR 568 - No Fixed Gross Sum, assessable annuity
Court held that since there was no fixed gross sum or definite purchase price, because the total amount
payable would vary depending on how long the taxpayer lived, the 1,200 pound payment receied each
year for the duration of the taxpayer’s life was not an instalment of a capital price but an annuity
Moneymen Pty Ltd v FCT 91 ATC 4019 – No Fixed Gross Sum, assessable annuity
Facts: Taxpayer sold wholesale milk business under contract to CCA for amount payable over remaining
term of contract. CCA was liable to pay highest daily price for a specified amount of milk supplied by
taxpayer, which was calculated as a proportion of net price payable for specified monthly supply.
Held: No fixed gross sum payable for the rights sold by the taxpayer, and so same as above case.
Royalties
Royalty = a payment for the use of another person’s property, generally where the payment is tied to the
amount of use (eg. copyright, payment, design, equipment, knowledge, technology)
McCauley v FCT (1944) 3 AITR 67
Facts: Taxpayer was dairy farmer who owned land where trees grew, though he did not acquire the land
for purpose of growing timber or selling it. He entered into agreement with L, to sell L the right to cut and
remove the timber on portion of land for a price or royalty of 3 for each and every 100 superficial feet of
timber cut – so to pay appropriate ‘price or royalty’ under the contract
Held: Amount received were royalties, because:
- paid for right to remove timber
- amounts payable were measured by quantum of timber removed
- payments were made contemporaneously with the exercise of the right
Stanton v FCT (1955) 92 CLR 630 Facts: Taxpayer was also farmer, entered into agreement with sawmiller for sale of timber. Agreement
was that vendors sold to the purchaser 3m ft of millable timber, with the right to cut and remove timber
from the land. The price was set and to be paid in equal quarterly instalments. Payment was required
whether or not the sawmiller cut any timber,
Held: not a royalty, because the amount to be paid was NOT related to the quantity or value of timber
felled under the agreement.
 Generally included in assessable income as ordinary income under s6-5
 s15-20 royalties that are not ordinary income: will include these amounts in assessable income
as statutory income
 s6(1) ITAA36 statutory royalties – ordinary income characterised as royalty by the statutory
definition is a payment for the use of know-how where the taxpayer does not actually acquire a
right to intellectual property or know-how
Sherritt Gordon Mines (1977) 7 ATR 726
Facts: S agreed to supply technical assistance to WMC in the form of know-how (giving instructions and
assistance). WMC agreed to pay an aggregate sum expressed as % of Aggregate System: payments being
spread over 15 years from commencement of operations.
Held: payments were not royalties – payments were not made in consideration of the grant of a right.
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Dividends + Gains from Shares


Dividends are included in assessable income under s 44(1) ITAA36
Other gains from shares may be ordinary income (FCT v McNeil 2007 ATC 4223)
Tutorial Questions (week 5)
1. ‘Assessable income’ comprises which types of income?
a. Ordinary s 6-5 = generally most income which comes in to a taxpayer is ordinary income
i. Eg. salaries, wages, commissions, interest income
b. Statutory s 6-10
i. Eg. net capital gain
2. How does the judicial concept of income differ from the economic concept of income?
a. Judicial concept is in relation to case law, so it is income according to ordinary concepts.
From Scott v CT (1935) – determined in accordance with the ordinary concepts and
usages of mankind
i. Once you sell, it is realised immediately
b. Economic concept: is based on an actual calculation, as income = consumption + savings
i. Movement of the value of savings – do not pay tax on the movement
(unrealised)
3. Explain the reconciliation rule in s 6-25 ITAA97.
a. Where an amount may be included in the taxpayer’s assessable income as either
ordinary income or statutory income, use the statutory income provision (no double
taxation)  statutory prevails
4. In the case of Federal Coke, which taxpayer should the Commissioner have sought to assess?
Explain your reasoning.
a. Bellambi because they are a parent company, and they will need to pay tax on the
compensation
Question 1
Consider whether the taxpayer has derived ‘ordinary income’ in the following situations. Make sure
you refer to relevant cases and Parson’s Propositions in your answer.
a) $1m won in a lottery
a. Not ordinary income based on PP 9: a mere windfall gain does not have the character of
income
b) Tips received by a taxi driver
a. Yes, tips related to his income – ordinary income (income earning activity) based on PP
13, s 6-5
c) Half of the taxpayer’s salary, paid by his employer, at the taxpayer’s direction, to his wife
a. Yes – ordinary income (income earning activity) based on PP 13, s 6-5
d) Proceeds of selling ice cream from an ice cream parlour
a. Yes, ordinary income, PP 14
e) Proceeds of selling a shoe factory
a. No, capital gains but not ordinary income
b. PP 7: there is no gain if an item is derived by the taxpayer as a contribution to capital
f) $50,000 embezzled from an employer
a. Not ordinary income – if business is illegal – earning income whether its ordinary income
or not – not entitled to it
b. PP 6: there is no gain if an item is derived by the taxpayer from himself – did not come
from outside source as he was dealing with himself
c. PP 5: there will be no gain unless an item is derived by the taxpayer beneficially
g) $1,000 won in a bet on a greyhound race
a. Not income, unless someone is carrying on the business of gambling – PP 9: a mere
windfall gain does not have the character of income
h) 5kg of macadamia nuts consumed by a farmer from his macadamia nut farm
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i)
j)
a. Not income – PP 6: there is no gain if an item is derived by the taxpayer from himself –
did not come from outside source as he was dealing with himself
$500 discount on a new iphone
a. Not ordinary income (savings of your expense), PP 1 and 2: must ‘come in’ to the
taxpayer, and would be chargeable for income tax on it
A gift of $1,000 received from grandparents
a. Not income
b. PP 8: a gain which is a mere gift does not have the character of income
Question 2
Geoff is employed as a full-time architect. In his spare time, Geoff participates in rowing competitions. He
is committed to the pursuit of excellence in rowing and over the last couple of years he has achieved
world ranking as a rower. Geoff has competed successfully in a range of national and international
competitions. In the 2016-17 year of income, Geoff received the following amounts. Advise Geoff
regarding the assessability of the above receipts.
Issue: What is the assessability of the receipts?
 $100,000 architect salary
o Assessable because under PP1 and PP2, it is income that has ‘come-home’ to the
taxpayer and been derived at the net realisable amount – ordinary income s 6-5
 $40,000 prize money from local and international events
o Not assessable: PP 9 – a mere windfall (from lottery/gambling winnings) does not have
the character of income
 $10,000 government grants to provide assistance with training
o Not assessable: PP 7: no gain if an item is derived by the taxpayer as a contribution to
capital
o Ordinary income
 $30,000 fees for his appearances at rowing conventions
o Assessable because under PP1 and PP2, it is income that has ‘come-home’ to the
taxpayer and been derived at the net realisable amount
o Committed – means that considered to be an occupation – FCT v Stone
o S 21-A: non-cash benefit provided from a business relationship
 Fridge (valued at $10,000) from a major sponsor
o Not assessable: PP 8 – a gain which is a mere gift does not have a character of income
o Non-cash benefit but translate into value and calculate that as part s 15-2
Conclusion: Based on the case FCT v Stone, all of Geoff’s receipts are considered to be assessable as he
had earned all of these assets and money from his ‘business’ as an athlete.
Question 3
While studying at university, Shelly works part-time as a waitress, in a seafood restaurant. For the
2017/18 year of income, Shelly receives wages of $30,000 from working in the seafood restaurant. She is
very popular with the customers and also receives $700 cash in tips during the 2017/18 year of income.
In December 2017, Jack, a regular customer, also gives Shelly a very large box of expensive Haigh’s
chocolates worth $200, around Christmas time. Shelly does not generally eat chocolate, as she always
adheres to a very strict sugarfree diet, so she gives the chocolates to her mother.
During the Christmas holiday period, Shelly is visited by her grandparents. She receives a gift of $5,000
from her grandparents.
Advise Shelly regarding the assessability of the amounts and/or benefits received (above) in the
2017/18 year of income.
 $30,000 wages = assessable – PP1, 2: amount must ‘come-in’ and was ‘derived’
 $700 tips = assessable – PP 4: gain by taxpayer who derived it
 $200 chocolates = not-assessable – PP8: gain that is a gift
o Because it is Christmas time and she did not eat the chocolates = considered to be a gift
37
o

If it was at another time of the year or given the reason for it (eg. for her good
performance), it would be considered to be part of her income (translated into $200) as
it is similar to a tip – the customer is giving her a benefit
$5,000 from grandparents = not-assessable – PP8: gain that is a gift
Question 4
Qian is a food magazine editor who works full time at a high-profile magazine publishing company,
MagCo Pty Ltd. Qian enjoys writing about food, and in her spare time she writes short reviews about the
food that she eats at restaurants. Qian generally does not publish her reviews as she writes for pleasure.
In January 2018, Qian enters an Australia-wide food-writing competition with a first prize of $30,000. She
writes an excellent review on some deep-fried chilli prawns that she tastes at a restaurant in Sydney
Harbour, and she wins the first prize of $30,000 in the competition. A few weeks later, Qian is
approached by a representative of the Food Network TV Channel. Qian enters into an agreement with
the Food Network TV Channel in which she agrees to make herself available for a series of interviews
about food offered at various restaurants in Sydney, in consideration of a payment of $20,000 to Qian, by
the Food Network TV Channel. One weekend in April 2018, Qian visits Star City casino with some friends.
She wins $1,000 in a game of Mahjong.
Advise Qian regarding the assessability of the amounts received (above) in the 2017/18 year of income.
 $30,000 prize = assessable = PP5: no gain unless item is derived by taxpayer beneficially
o She normally edits for the food magazine, but from her work she has the skill of being
able to write short reviews. If there is a sufficient connection between the money and
your skill in your work, it will be assessable income – basically one field of work
 $20,000 from TV show = assessable – PP1, 2: amount must ‘come-in’ and was ‘derived’
 $1,000 from casino = non-assessable – PP9: gambling/lottery winnings are not income
Question 5
Alan is an accountant who works full time at a top tier accounting firm. In his spare time he likes to watch
movies and he dabbles in film script-writing which he enjoys immensely (even though he is not very good
at it). After a short holiday during which he goes hiking in the wilderness of Canada, Alan returns home to
Sydney, he is inspired and writes a script about a hiker’s encounter with a werewolf. He enters it in a
national film script-writing competition for fun. It so happens by chance that the judge of the competition
has a particular fascination/interest in the possible existence of mythical creatures such as werewolves.
He awards Alan the first prize of $20,000 in the competition. Several months later, Alan is approached by
the Australian National Film Association (ANFA). He enters into an agreement with ANFA in which he
assigns copyright in the film script to ANFA for consideration of $80,000. In the agreement, Alan also
agrees not to write a similar film script for a period of 18 months following the release of the film. The
premiere screening of the film ‘Encounter with a WereWolf’ is held in Perth. Alan attends the premiere
and ANFA provides Alan with free, non-transferable accommodation for two weeks at a hotel/resort in
Perth. The film is an overwhelming success.
Advise Alan as to whether any of the amounts or benefits he receives are ordinary income to him. (At
this stage, do not consider s21 and 21A ITAA36, s15-2 ITAA97, FBT or CGT).
 $20,000 prize = winnings are not considered to be income – it is just for fun, so he is not carrying
on a business and it is not related to his profession
 $80,000 contract = copyright is capital gains nature
 18 months restriction covenant = capital gains nature
 Is he carrying on a business? No, because he is not ‘committed’
 Free accommodation = not ordinary income
Tutorial Questions (week 6)
1. How do you determine whether a taxpayer is carrying on a business? Make sure you refer to
relevant cases in your answer.
a. Profit-making purpose (Californian Copper Syndicate v Harris (Surveyor of Taxes) (1904)
5 TC 159 – intention to profit (whether it is actually profiting or not is not relevant)
b. Systematic and organised (Thomas v FCT 72 ATC 4094)
38
c. Size/scale (FCT v Walker) 85 ATC 4179 Rutledge v IRC (1929) 14 C 490
d. Frequency (FCT v Whitfords Beach) – depends on the nature of the business (eg.
seasonal – such as Halloween)
2. Explain the two strands of reasoning in the Myer Emporium case.
a. Assessed amount of $45m on the basis that it was income and not a capital receipt – if
circumstances give rise to the inference that the taxpayer’s intention was to profit, the
profit will be income even if the transaction was extraordinary judged by reference to
the ordinary course of the taxpayer’s business – gain as a result of an isolated venture or
‘one-off transaction; does not preclude it from being properly characterised as income
b. 1st strand: extraordinary or isolated transactions that satisfy these 3 requirements will
be ordinary income
i. There was a business operation or commercial transaction: if it is an ordinary
transaction, the test is automatically satisfied. If it is an isolated transaction,
(without continuing business operations), it will need to be a commercial
transaction.
ii. There was a profit-making intention upon entering the transaction
iii. The profit was made by means consistent with the original intention
c. 2nd strand: expresses the principle that the proceeds from a transaction will be ordinary
income if the taxpayer sells the right to income from an asset without selling the
underlying asset
3. Compare the decisions in Scottish Australian Mining and Whitfords Beach. How may the facts
in Whitfords Beach be distinguished from Scottish Australian Mining?
Scottish Australian Mining:
Facts: The taxpayer purchased the land in 1860s for the purpose of coal mining. But after coal from land
exhausted, the taxpayer subdivided the land, built roads and buildings including railway stations with
intention to sell land and get maximum benefits as land was no longer useful to carry out its original
business operations.
Issue: Of business income and whether or not the subdivision and sale of land that had been used as a
mine by a mining company was assessable as ordinary income or was merely a realisation of a capital
asset.
Held: Court allowed the appeal of the taxpayer stating that the intention was not to engage in the
business of developing and selling the land but they were merely disposing off a capital asset in the best
of advantage way.
Whitfords Beach:
Facts: Taxpayer was originally using land for domestic purpose and by fishermen who held shares of the
company. Developers bought shares in the company when the land value increased and company
subdivided the lot. When company was sold – on the intention of the new shareholders – because the
intention to sell was for profit-making and looked at intentions of shareholders = change in intention so it
was income.
Held: Profit from the sale of land should be assessed as the income from carrying out the business
operations as clearly the intention was to earn profit from sale of land as part of their business operation
and the taxpayer never intended to use the land as domestic purpose
4. Give three examples of income from property.
a. Income from property is something you earn, something that belongs to you
b. Interest – payment that is due because creditor has not had his money at due date
c. Rent – price paid for right to use another person’s property
d. Annuities – a specified amount paid at specified intervals for a fixed/contingent period
5. Explain reasons for the different outcomes in the decisions in McCauley v FCT and Stanton v
FCT?
a. The difference was that they were structured differently – how often, how many times =
if it is once off, it is not a royalty
39
b. McCauley v FCT: found to be a royalty
i. Payment was for the exercise of the right to cut the timber, not for the timber
itself (i.e. a payment for each time they did it)
c. Stanton v FCT: found not to be a royalty
i. In effect what was happening was that the grazier was selling the timber for a
lump sum and whether the purchaser came and cut it or not was a matter for
him.
6. Compare the decisions in Egerton-Warburton and Foley v Fletcher. How may the facts in
Egerton-Warburton be distinguished from Foley v Fletcher?
Egerton-Warburton – ANNUITY
Facts: Father and 2 sons – father owned certain land that had farming and orcharding business. Father
entered agreement to sell land to the partnership of his two sons to carry on business and in
considerations of payments. The annuity to the father was secured by a registered instrument of charge
over the land and in accordance with agreement that sons paid – Commissioner assessed father on this
amount under ITAA because it constituted an income receipt. The father said that the receipt was not of
an income nature but of a capital nature, being an instalment of the capital price of the sale of land.
Held: Since there was no fixed gross sum or definite purchase price, because the total amount payable
would vary depending on how long the taxpayer lived – the 1,200 pound payment received each year for
the duration of the taxpayer’s life was not an instalment of the capital price, but rather an assessable
annuity payment. = NO FIXED AMOUNT = ANNUITY
Foley v Fletcher – NOT ANNUITY
Facts: The taxpayer sold her rights in certain property for 45,000 pounds, with payment being a way of
lump sum of 3,885 pounds, and the balance by six monthly instalments for a period of 30 years.
Held: Since the price of the property was clearly specified as 45,000 pounds (a fixed gross sum), the court
was able to characterise the half-yearly payments as mere instalments of a capital price, but not
annuities.
7. Consider s15-2 ITAA97, s21 and s21A ITAA36. How (if at all) might these provisions affect your
answer to the Alan problem question in the Week 5 Tutorial questions?
a. s15-2, ITAA97 includes in the assessable income of the taxpayer, the value to the
taxpayer of any allowances, gratuities, compensation, benefits, bonuses and premiums
provided to the taxpayer in respect of or for or in relation directly or indirectly to, any
employment of or services rendered by the taxpayer.
i. Personal exertion or employment
b. s21A does NOT deem the non-cash benefit to be income, it must already be income
i. Where s21A applies, the benefit may be brought to account at its “arm’s length
value”, reduced by any contribution made by the recipient (see s21A for further
details)
ii. Taxpayer needs to carry on the business – if not, s 21 is not applicable (step 1)
iii. Non-transferable application = if not carrying on business, and benefit he is
getting is not related to personal exertion (what he is doing or employment), it
is not considered
iv. But if is that he is a professional writer, non-cash benefit you have to convert
into cash
c. It is important to know whether he is carrying on the business or not
Question 1:
WhizzCo Ltd is a wholesaler of electrical appliances imported from Europe. WhizzCo holds 5 valuable
import quotas which permit it to import stock from overseas. As part of a large-scale business
restructuring following an economic downturn, WhizzCo sells 3 of its import quotas at a profit. In an
effort to finance its restructuring WhizzCo enters into a series of transactions. WhizzCo lends $70 million
to a subsidiary for a term of 5 years at an interest rate of 13% per annum. A few days later, WhizzCo
40
assigns the right to receive the future interest, to another company FinCo in consideration of FinCo
paying WhizzCo a lump sum of $30 million.
WhizzCo also acquires a block of land with the intention of building a new warehouse on it. However, it
turns out that the land is unsuitable for building a warehouse as it is located too close to the ocean and
the salt breeze would cause rusting of the electrical appliances. WhizzCo subsequently sells the land to
another company LandCo Ltd, at a profit.
WhizzCo also moves from its current leased premises to new leased premises following receipt of a
$10,000 incentive payment from a landlord.
Advise WhizzCo Ltd as to whether any of its receipts from the above transactions are ordinary income
to WhizzCo Ltd. (At this stage do not consider CGT)
Transactions: what is the nature of the selling?
 Sells 3 (out of 5) of its important quotas at a profit = right of company to import or export
o Not ordinary income, selling capital asset
 Right to receive the future interest – lump sum of $30m (profit-making scheme)
o Similar to compensation in Myer’s Emporium case
o Consider that this is income nature
 Acquiring and selling land to LandCo at a profit
o Purely capital as it is just to build a warehouse
 10,000 incentive payment
o Ordinary course of the business so ordinary income
o Parson’s Proposition 14
Question 2:
During her childhood and while growing up, Jodie travelled a lot and purchased scarves from different
countries. Jodie has more than 1,000 scarves.
Recently, while attending an alumni event at her former university, Jodie was injured when she tripped
over her own scarf and fell down some stairs. She broke her leg and was in hospital and unable to work
for 6 months. Luckily, Jodie had previously taken out an income-protection insurance policy, so she
received payments under the insurance policy during the time that she was unable to work.
Although she has now recovered and is back at work, Jodie has developed a phobia of scarves, and has
decided to sell her scarves. She arranges for the scarves to be examined by an expert valuer. She is
surprised and pleased to discover that the collection is valued at $200,000. In order to facilitate the sale
of her scarves, Jodie enters into a 6-month lease of a small store in a large shopping centre, and hires
sales staff to sell the scarves, generating proceeds from sale of the scarves.
Advise Jodie regarding the income tax consequences of the above transactions. (At this stage do not
consider CGT)
There are two transactions:
 Payment from insurance company
o Income nature – income-protection insurance  if it replaces income, it is income
 She is selling her scarves
o If she is carrying on the business = the proceeds will be ordinary income
 She knows she can make profit
 Everything is organised: she has the scarves looked at be an expert valuer, hires
staff
o If not a business = capital gain
Question 3:
Hungerfords Pty Ltd conducts a large food manufacturing and distribution business. Hungerfords and
BeefCo entered into a distribution agreement under which Hungerfords Pty Ltd was appointed by BeefCo
as the sole distributor of BeefCo’s ‘Supersize Pies’. This was a key distribution agreement in Hungerford
Pty Ltd’s frozen foods division. A few months later BeefCo Ltd wanted to take over distribution of the
41
‘Supersize Pies’. BeefCo Ltd cancelled the distribution agreement and paid Hungerfords Pty Ltd a lump
sum of $400,000 as compensation.
Advise Hungerfords Pty Ltd regarding the income tax consequences of the above transaction? (At this
stage, do not consider CGT)
Transactions
 Only one transaction – compensation of $400,000
 Lump sum was paid for the agreement (distribution) – if it was not in place of income
 If activity fundamental to company = capital (Compensation Principle)
o California Oil Products (1934) 52 CLR 28
o Look into the business as a whole – this is a large food manufacturing and distribution
business; the frozen food is just one line of many lines = it is not fundamental to the
business and not critical to the business
o So, in this one contract and they lose it = they will lose all capital
 Because they have more than one line and it is not critical nor fundamental = ordinary income
42
Capital Gains Tax (CGT)
History/Background





Pre 1985 statutory provisions in ITAA36
1970’s Asprey Committee recommended introduction of a general tax on capital gains
1985 Pt IIIA, ITAA36
Tax Law Improvement Project (TLIP) – CGT provisions in ITAA97 focus on ‘CGT Event’
Ralph Review – CGT discount 50% for individuals re assets held for 12 months or more
Policy Rationale




Broadening tax base through statutory additions to income
Vertical equity and Horizontal equity
Efficiency
‘in a taxation system in which ability to pay is a primary test of liability, capital gains, whether
accrued or realised, constitute an increase in ability to pay in so much the same way as receipts
of wages, salaries interest, dividends and rents as to make it inequitable for them not to br
brought to tax’ – Asprey Committee Report
Introduction to Capital Gains Tax (CGT)






Not a separate tax
Integrated into income tax regime
S 102-5, ITAA67 includes your net capital gain for the income year, in your assessable income
Step-by-step approach to calculate net capital gain
Capital losses quarantined – only offset against capital gains, not deductible, net loss carried
forward
Only applies to assets acquired on or after 20 Sep 1985 (prospective basis)
Calculation of Net Capital Gain
Step 1
Step 2
Step 3
Step 4
Step 5
Identify a CGT event
 Identify CGT events that have occurred in the year – see s 104-5
 Determine whether a capital gain or capital loss has been made
 Reduce capital gains for the year by capital losses for the year
 Calculate gain/loss for each event, s 102-22
 Reduce gains by losses
Apply the balance of previous years unapplied net capital losses
 For calculation of net capital loss see s102-10
 Apply in the order incurred s 102-15
Apply the discount, if available
 What is a discount capital gain? See Div 115
 Who is entitled to the discount? Includes individuals, complying super funds, trusts
 Other requirements: 12 month holding rule
 Excluded events – s115-25(3)
 Discount rates: 50% for individuals, trusts 1/3
Apply small business concessions, where available
The amount of any remaining capital gains in the taxpayer’s net capital gain for the year
This amount is included in assessable income by s 102-5(1)
S 104-5 CGT Events


S 104-5 summary of CGT Events
Must be able to identify a CGT Event (contrast formal model – disposal of asset)
43

Note s102-25: where more than one CGT Event may apply, use the event most specific to your
situation. Only if no other event applies, use D1 or H2.
S 108-5 What is a CGT Asset?
(1) A CGT asset is:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
(2) To avoid doubt, these are CGT assets :
(a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it;
(c) an interest in an asset of a partnership;
(d) an interest in a partnership that is not covered by paragraph (c).
Note 1: Examples of CGT assets are:
 Land and buildings;
 Shares in a company and units in a unit trust
 Options;
 Debts owed to you;
 A right to enforce a contractual obligation;
 Foreign currency
But, personal liberties and freedoms are NOT CGT assets as they are not legal or equitable rights
recognised and protected by law.
CGT Event A1 – Disposal of CGT Asset (most common)
CGT Event A1 – s104-10(1)
(2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether
because of some act or event or by operation of law. However, a change of ownership does not occur if
you stop being the legal owner of the asset but continue to be its beneficial owner.
(3) The time of the event is:
(a) when you enter into the contract for the disposal; or
If there is no contract – when the change of ownership occurs
There is no change in ownership where land is subdivided or titles to land amalgamated.
If the CGT asset in question was acquired by an entity under a power of compulsory acquisition conferred
by Australian law or foreign law, the time of CGT event A1 for the taxpayer disposing of the CGT asset is
the earliest of: when the taxpayer received compensation, when the entity became the asset’s owner,
when the entity entered it under that power, and when the entity took possession under p that power.
Example: In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You
make a capital gain of $50,000.
The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 19992000 income year (the year that settlement takes place)/
Note 1: If the contract falls through before completion, this event does not happen because no change in
ownership occurs.
CGT Event C1 – Loss/destruction of CGT Asset
CGT Event C1 – s104-20(2)
(1) CGT event C1 happens if a CGT asset you own is lost or destroyed
(2) The time of the event is:
(a) when you first receive compensation for the loss or destruction; or
(b) if you receive no compensation – when the loss is discovered or the destruction occurred
A capital gain is made if the capital proceeds from the loss or destruction are more than the asset’s cost
base. A capital loss is recognised if the capital proceeds are less than the asset’s reduced cost base.
44
CGT Event C2 – Cancellation, surrender or similar endings of intangible CGT asset
CGT Event C2 – s104-25
(1) CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:
(a) being redeemed or cancelled; or
(b) being released, discharged or satisfied; or
(c) expiring; or
(d) being abandoned, surrendered or forfeited; or
(e) if the asset is an option – being exercised; or
(f) if the asset is a convertible interest – being converted.
(2) The time of the event is:
(a) when you enter into the contract that results in the asset ending; or
(b) f there is no contract – when the asset ends
The capital proceeds from CGT event happening is the amount received for the termination of the agreement.
CGT Event D1 – Creating contractual/other rights
CGT Event D1 – s104-35
(1) CGT Event D1 happens if you create a contractual right or other legal or equitable right in another
entity.
Example: you enter into a contract with the purchaser of your business not to operate a similar business
in the same town. The contract states that $20.000 was paid for this. You have created a contractual right
in favour of the purchaser. If you breach the contract, the purchaser can enforce that right.
(2) The time of the event is when you enter into the contract or create the other right
A capital gain arises if the capital proceeds accruing from the creation of the right exceed the incidental
costs incurred by the creator of this right that relate to the CGT event and vice versa.
D1 event does not occur if:
 Right was created through the borrowing of money or the obtaining of credit from another entity
 Right required taxpayer to do something which constitutes another CGT event for taxpayer (eg.
to sell land but would be same as A1 event)
 Company issues or allots shares, or
 Trustee of a unit trust issues units in the trust
Calculation of capital gains/capital losses
How to calculate the capital gain or loss for most CGT events (s100-45)
1. Work out your capital proceeds from the CGT event (s 116-20)
a. Money the taxpayer has received, entitled to receive regarding CGT event,
b. The market value of any other property the taxpayer has received or entitled to receive
2. Work out the cost base for the CGT asset (has 5 elements under s110-25)
3. Subtract the cost base from the capital proceeds
4. If the proceeds exceed the cost base, the difference is your capital gain
5. If not, work out the reduced cost base for the asset
6. If the reduced cost base exceeds the capital proceeds, the difference is your capital loss
7. If the capital proceeds are less than the cost base but more than the reduced cost base, you
have neither a capital gain nor a capital loss
S 110-25 Cost Base
1. Money or property given
2. Incidental costs (see s 110-35 – exhaustive list)
a. Remuneration for professional advice (eg. surveyor, accountant, legal advisor)
b. Costs of transfer
45
c. Stamp duty
d. Advertising or marketing costs
e. Costs relating to making of any valuation or apportionment for CGT purposes
f. Search fees relating to CGT asset (fees payable in checking land titles)
g. Costs of a conveyancing kit or similar
h. Borrowing expenses (eg. loan application fees and mortgage discharge fees)
i. Certain expenses incurred by a head company or consolidated group
j. Termination or similar fees (eg. exit fee) incurred by taxpayer
3. Ownership costs
a. Improvement, moving and installation expenditure, and
b. Expenditure to establish, preserve or defend title to or rights over the asset
c. Rates or land tax (if asset is land)
d. Interest on money borrowed to refinance the money borrowed to acquire asset
e. Interest on money borrowed to finance the capital expenditure incurred to increase the
asset’s value
4. Capital expenditure to increase or preserve the asset’s value
5. Capital expenditure to establish, preserve or defend title or right to asset
Note: 2nd and 3rd elements do not include amounts which are otherwise deductible (see 110-45(1B))
S110-55 Reduced Cost Base



Used to determine the amount (if any) of capital loss
Similar to cost base except for 3rd element – any amount that is assessable because of a
balancing adjustment for the asset or would be assessable if certain balancing adjustment relief
was not available
See also Market Value Substitution Rule s112-20, s116-30:
o Time of acquisition, if:
 Taxpayer did not incur any expenditure to acquire it
 Some or all of the expenditure incurred to acquire it cannot be valued, or
 The taxpayer did not deal at arm’s length with the other entity in connection
with the acquisition (if CGT asset is a share in company or unit in unit trust)
Calculation – examples
Example 1
Joan buys a vacant block of land for $110,000 on 1 January 2002, Joan pays $1,900 in stamp duty and
$1,500 in legal fees in relation to the purpose. Joan sells the land on 1 January 2018 for $200,000. Joan
pays $12,000 commission and $1,000 in legal fees in relation to the sale. Interest on the money borrowed
to fund the purchase was $28,000 and Joan paid $4,000 in rates. Joan did not obtain any deductions
under s8-1 for the interest or rates paid.
Cost base = $110,000 (purchase price)
+ $1900 + $1500 + $12,000 + $1000 (incidental costs of acquisition)
+ $28,000 + $4000 (costs of ownership, non-deductible)
= $158,000
Capital gain = capital proceeds – cost base
= $200,000 - $158,000
= $41,600
 Offset any capital losses (n/a)
 Offset any net capital losses carried forward (n/a)
 Apply Discount 50% x $41,600 = $20,800
 Apply any small bss concessions (n/a)
So, net capital gain = $20,800
46
Example 2
How would your answer in Example 1 be different if Joan sold the land for $120,000?
Reduced cost base = $110,000 (purchase price)
+ 1900 + 1500 + 12,000 + 1000 (incidental costs of acquisition)
= $126,400
Capital loss = reduced cost base – capital proceeds
= $126,400 – 120,000
= ($6,400)
 No other capital losses
 No net capital loss carried forward
 No capital gains from other CGT events
So, net capital loss = $6,400 Joan will carry forward
Personal Use Assets





Definition s108-20(2): four categories of assets include:
o A CGT asset (other than a collectable) used or kept mainly for the personal use or
enjoyment of the taxpayer in question or an associate of the taxpayer
o An option or right to acquire such an asset
o A debt arising from a CGT event affecting such n asset, and
o A debt arising other than in the course or gaining or producing assessable income or
from carrying on a business
o DOES NOT INCLUDE: land, stratum unit or building or structure taken to be a separate
CGT asset
Capital losses disregarded s108-20(1)
Set rule s108-25 (the 3 conditions below)
Costs of ownership not included in cost base s108-30
Disregard capital gains where cost is $10,000 or less s118-10(3):
o When 3 conditions are satisfied, the set of personal use assets is taken to be a part of a
single use asset and each article disposed of separately is treated as a disposal or part of
that asset.
 The taxpayer in question owns personal use assets that are a set
 The personal use assets would ordinarily be disposed of as a set, and
 They are disposed of in one or more transactions for the purpose of obtaining
the exemption conferred on collectables acquired for $10,000 or less under
Collectibles





Definition s108-10(2): assets that are used or kept mainly for the personal use or enjoyment of
the taxpayer or an associate of the taxpayer:
o Artwork, jewellery, antique, a coin or medallion
o A rare folio, manuscript or book,
o A postage stamp or first day cover
o Interests in collectables, debts that arise from collectables and options or rights to
acquire collectables are also regarded as collectables (s108-10(3))
Quarantining of capital losses s108-10(1) and net capital loss carry forwards s108-10(4)
Set rule s108-15
Costs of ownership not included in cost base s108-17 (it is disregarded)
Capital gains disregarded where cost is $500 or less s118-10(1)
o When 3 conditions are satisfied, the set of collectables is taken to be a single collectable
and each article disposed of separately is treated as a disposal of part of that collectable:
 The taxpayer in question owns collectables that are a set
47




The collectables would ordinarily be disposed of as a set, and
They are disposed of in one or more transactions for the purpose of obtaining
the exemption conferred on collectables acquired for $500 or less under this s
Special rules where collectible is an interest in certain CGT assets s118-10(2)
Capital losses from collectables can only reduce capital gains from collectables s108-10(1). If
capital losses from collectables exceed capital gains from collectables in an income year, the
excess is carried forward to be applied against future gains from collectables (s108-10(5))
Reconciliation


Disregard gain or loss if picked up in another part of the Act, eg. depreciating assets (118-24) and
trading stock (118-25)
Reduce gain by amount already taken into account under the Act, see s118-20
Tutorial Questions
1. How is Capital Gains Tax (CGT) integrated into the income tax regime?
a. Integrated into income tax regime
b. S 102-5, ITAA67 includes your net capital gain for the income year, in your assessable
income
c. Step-by-step approach to calculate net capital gain
d. Capital losses quarantined – only offset against capital gains, not deductible, net loss
carried forward
e. Only applies to assets acquired on or after 20 Sep 1985
2. Outline the steps involved in calculating a taxpayer’s ‘net capital gain’ in the relevant income
year?
a. When did CGT event happen?
b. What is the CGT event?
c. If CGT asset – what is the asset? When was it purchased?
d. Calculate the cost base for the CGT asset – understand the proceeds
e. Loss carried forward from prior year and this year, and then discount
f. Net gain
3. What are ‘capital proceeds’?
a. From ATO website: are whatever you receive as a result of CGT event is referred to as
your capital proceeds. For most CGT events, your capital proceeds are an amount of
money or the value of any property you receive or are entitled to receive.
b. ATO WEBSITE ELEMENTS ADD HERE
c. RCB: reduced cost base (cannot be calculated by element 3)
4. Outline the special rules that apply to ‘collectables’ and ‘personal use assets’.
a.
5. Give three (3) examples of CGT exemptions.
a. Pre-CGT Assets
b. Individual’s main residence
c. Cars, motorcycle, (does not consider value increasing or decreasing)
d. Decorations awarded for bravery
Question 1
What are the CGT consequences in the following situations based on the below facts?
a) Frank purchased a block of land in January 2017 for $1.5 million. In June 2017, he entered into a
contract to sell the land to Bart for $3 million. The contract provides that settlement is to occur
in August 2017.
a. Acquisition cost – cost base
b. He sold it in June = $3m will be the proceed
c. CGT event happened in June 2017
d. CGT event – A1
48
b)
c)
d)
e)
e. Capital gain is $1.5m (proceed minus cost base)
f. Not entitled to discount as asset was owned for < 12m
Alice acquired land in January 1983 for $200,000 and recently sold the land for $2 million.
a. Before 1985 September so pre-CGT event so exempt
Kate acquired a factory in August 2005. The factory was destroyed by fire in January 2015 and
she received compensation from her insurer in September 2015.
a. Exempt C1
b. Received in September
c. Have CGT asset – factory
d. She bought the factory – clearly saying that it is a CGT event
e. Event happened is when she first gained compensation
f. If compensation received in total is more than total purchase of asset = gain
g. If less = loss
In August 2017, Bob’s units in a unit trust were redeemed by the trustee for $5,000. Bob had
purchased the units in November 2016 for $4,000.
a. C2
b. Cancellation and surrender
c. August 2017
d. By $1000 gain
In June 2017 Carl sold his business to James and agreed that he would not operate a similar
business in the same suburb for the next five years. James paid Carl $20,000 in respect of this
restriction. Carl incurred $1,500 in legal fees in relation to the transaction.
a. D1 – happened when they entered into agreement June 2017 by $18500
b. No
Question 2
Jill buys a vacant block of land for $120,000 on 1 January 2001. Jill pays $2000 in stamp duty and $3000 in
legal fees in relation to the purchase. Jill sells the land on 1 January 2017 for $290,000. Jill incurs $2900 in
legal fees and pays $20,000 commission in relation to the sale. Jill paid $30,000 interest on the money
borrowed to fund the purchase of the land, and paid $5,000 in rates in respect of the land. Jill did not
obtain any deductions under s8-1 for the interest or rates paid.
a) What are the CGT consequences regarding the above transactions?
a. A1 – disposal of asset
b. 1st January 2017
b) How would your answer be different if Jill sold the land for $130,000?
a. If loss – how much is the reduced cost base?
b. 1st element: money paid or property given for the CGT:
i. Paying for block of land of $120,000
c. 2nd element: incidental costs of acquiring the CGT asset or that relate to the CGT event
i. $2000 stamp duty
ii. $3000 in legal fees
d. 3rd element: cost of owning the assets
i. As it is vacant land – it is included here (if it was investment property/rental
property, it would not be as interest of loan is deductible)
1. Investment property, investment purpose (will go into P&L)
ii. 182,900 as cost base
iii. 107,100
iv. Whether she is entitled to discount. It was held for more than 12 months so
$53,550 (net capital gain)
v. 147,900 – take out the selling price $130,000 which leaves $17,900 loss (no
discount on loss – never discounted)
e. Capital gain take
49
Question 3
Hugh is an Australian actor who grew up on the Central Coast. In January 2000, following his success in
acting in a broadway musical, he purchased a block of land in Dural for $1 million. In February 2003, Hugh
acquired a parcel of shares in CorpCo Ltd for $50,000.
A few years later, in February 2007, following his further success in several stage performances, he
acquired a block of land in the Central Coast for $700,000.
In January 2005, Hugh sold the block of land in Dural for $700,000. (Assume the reduced cost base of the
land was $1 million.)
In March 2005, Hugh sold the shares in CorpCo Ltd for $40,000. (Assume the reduced cost base of the
shares was $50,000.)
In February 2010, Hugh sold the block of land in the Central Coast for $1 million. (Assume the cost base of
the land was $700,000.)
In February 2012, Hugh acted in a blockbuster film and entered into an agreement with the film producer
that he would not act in any similar films for the next five years, in consideration of a payment of $30,000
made by the film producer to Hugh. Hugh incurred $5,000 in legal costs in relation to the transaction.
Based on the above facts, what is Hugh’s net capital gain/loss in the 2011/12 year of income? Show
your working.
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Fringe Benefits Tax (FBT)
History/Background – taxing fringe benefits
Previous approach:
 Former 26(e) ITAA36 (now s 15-2 ITAA97)
 “Your assessable income includes the value to you of all allowances, gratuities, compensation,
benefits, bonuses and premiums provided to you in respect of, or for or in relation directly to
indirectly to any employment of or services rendered by you ….’
 Problematic (eg. Cooke & Sherden, Tennant v Smith)
 Subjective valuation
 See also s 21A, ITAA36
Fringe Benefits Tax Assessment Act
Current approach:
Fringe Benefits Tax Assessment Act 1986 (FBTAA)
 A separate tax – s 66 imposes obligation to tax
 Taxpayer = Employer  policy rationale?
 Tax period is 1 April – 31 March
 ‘Reportable Fringe Benefits Amount’ included on employee’s payment summary where
individual fringe benefits amount is $2000 or more
 Employee’s individual fringe benefits amount (s 5E)
 Excluded fringe benefits (s5E(3))
 Quasi fringe benefits (s 135qQ)
 Self-assessment: employers are generally required to pay FBT in quarterly instalments, unless
their FBT liability in the previous year of tax was below $3,000
 FBT instalments credited against their actual FBT liability for the year
Outline of Key Steps
1.
2.
3.
4.
5.
Has a fringe benefit been provided?
Determine the taxable value of each benefit
Aggregate by type
Gross-up
Aggregate totals and apply FBT rate
S 136 – What is a ‘fringe benefit’?
S136, FBTAA
Fringe Benefit: a benefit provided during year of tax in respect of any year to employee/associate by
employer/associate/arranger/person participating in or facilitating the provision or receipt of the
benefit in respect of the employment of the employee
 Exclusion:
o Salary/wages
o Exempt benefits (eg. taxi travel to/from work, provision of work-related items)
o Superannuation contributions by employers
S 136 – Definitions




Benefit = any right (including a right in relation to, and an interest in, real or personal property),
privilege, service or facility including where provided under arrangements
Provide = allow, confer, give, grant or perform
Current employee = means a person who receives, or is entitled to receive, salary, or wages
Current employer = means a person … who pays, or is liable to pay, salary or wages
51


Salary or wages = means a payment from which an amount must be withheld under s 12-35 to s
12-120 Taxation Administration Act 1953
In respect of the employment of the employee: nexus between provision of the benefit and
employment must exist for there to be a fringe benefit (eg. if mere gift, nexus test not satisfied)
How to calculate Fringe Benefits Tax
FBT = ‘Fringe Benefits Taxable Amount’ x FBT rate
‘Fringe Benefits Taxable Amount’ =
 Type 1 aggregate fringe benefits amount x 2.0802
 + Type 2 aggregate fringe benefits amount x 1.8868
 + Aggregate non-exempt amount
Apply FBT Rate: 47% (2017/18), 49% (2016/17)
Note:
 S5B(1B) Type 1 – GST creditable, i.e. employer is entitled to claim GST credits
 S5B(1C) Type 2 – not GST creditable, I.e. employer is not entitled to claim GST credits (eg. the
provider is not registered for GST or because the thing supplied to the provider is GST-free or
input taxed).
Why gross up? Aggregate non-exempt amount – only for employers that provide benefits falling within
exemption in s57A, i.e. certain public/non-profit hospitals, public ambulance services providers, health
promotion charities, public benevolent bodies. Calculated as the sum of the grossed-up value of benefits
to each individual employee that exceeds certain thresholds
Valuation





Each kind of fringe benefit has its own valuation rules
Concessional treatment sometimes applies to ‘in-house’ benefits
Unreimbursed contributions by employee excluded
Otherwise deductible rule – where an employer is required to pay FBT on a fringe benefit and an
employee would not be entitled to claim a deduction as they have not incurred the relevant
expenditure
Reduction amounts (eg. s 62) the first $1000 of the aggregate of any ‘in-house fringe benefits’
(not provided under a salary-packaging agreement) provided to an employee in a particular year
of tax is not subject to FBT
Type of Fringe Benefits






Car benefits s7(1)
Debt waiver benefits s14
Loan benefits s16
Expense payment benefits s20
Housing benefits s25
LAFHA s30






Airline Transport Benefits s32
Board Benefits s35
Meal Entertainment Benefits s37AC
Car Parking Benefits s39A
Property Benefits
Residual Benefits s45
Example – Car Fringe Benefit
S9 FBTAA – Statutory Formula Method: ABC/D – E
 A is the base value of car
 B is the statutory fraction (now generally 0.2)
 C is the number of private days
 D is the number of days in a year
 E is the recipient’s contribution
52
S 10 FBTAA – Operating Costs Methods: (C x (100% - BP)) – R
 C is the operating cost of the car
 BP is the business %
 R is the recipient’s payment
Example: Tom’s employer provides him with a new Honda as part of his salary package. Each night the
car is garaged at Tom’s house. The leased car value of the Honda was $22,000. The lease costs are $750
per month. The other running costs including registration, insurance etc are $300 per month. Assume the
car travelled 20,000km during the year, 25% of which was on business. Assume this is a Type 1 fringe
benefit.
Statutory formula method:
 A base value
 B statutory fraction
 C number of private days
 D number of days in the year
 E recipient’s contribution
$22,000
0.2
365
365
0
Taxable value of car fringe benefit
= ((A x B x C)/D) – E
= (22,000x0.2x365)/365) – 0
= $4400
Gross up, i.e. Multiply by 2.0802 (Type 1 fringe benefit)
4400 x 2.0802 = 9,152.88
FBT payable = 9,152.88 x 47% (FBT rate) = $3,301.85
Operating Costs method
 C operating costs
($750 + $300) x 12 = $12,600
 BP business percentage
25%
 R recipient’s contribution
0
Taxable value of car fringe benefit
= [Cx(100%-BP)] – R
= 12,600 x 75% - 0
= 9,450
Gross up, ie. Multiply by 2.0802 (Type 1 fringe benefit)
9,450 x 2.0802 = 19,657.89
FBT payable = 19,657.89 x 47% (FBT rate) = $9,239.21
S67 Anti-avoidance



S 67 FBTAA general anti-avoidance rule
Commissioner can rely on s 67 where an arrangement is entered into for the sale or dominant
purpose of reducing an employer’s FBT liability
Commissioner may cancel the tax benefit arising under the arrangement and impose penalty tax
Interaction with other tax legislation





FBT takes priority over s 15-2 ITAA97
See 23L(1) ITAA36: fringe benefits are NANE income (to the employee)
See 23L(1A) ITAA 36 – exempt benefits are exempt income (to the employee)
FBT/the cost of benefits is generally deductible to employer under s8-1 ITAA97
Generally, GST is not paid on supplies that constitute the provision of fringe benefits unless a
‘recipient’s contribution’ is involved
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Deductions
Context – ITAA97
S8-1 General Deductions
S 8-1 Two Positive Limbs
(1) You can deduct from your assessable income any loss or outgoing to the extent than:
a. It is incurred in gaining or producing your assessable income; or
b. It is necessarily incurred in carrying on a business for the purpose of gaining or
producing your assessable income
S8-1 Four Negative Limbs
(2) However, you cannot deduct a loss or outgoing under this section 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 nonassessable non-exempt income; or
d. A provision of this Act prevents you from deducing it
S8-10 No double deductions
Where a loss/outgoing may be deductible under more than one provision, use the most appropriate
provision.
No double deductions
Key requirements
1. Nexus test: is there a sufficient connection between the loss/outgoing and either one of the
positive limbs?
2. If so, the loss/outgoing is NOT capital?
Loss or outgoing


Loss - taxpayer’s financial resources have been diminished, eg. taxpayer’s money has been stolen
(Charles Moore & Co (WA) Pty Ltd (1956) 95 CLR 344) write off bad debts (AGC (Advances) Ltd v
FCT (1975) 132 CLR 175)
Outgoing- usually involves some form of payment, outlay or expenditure, or the taxpayer is
committed to spend money eg, has received invoice
In gaining or producing
 In = in the course of
 ‘Incidental and Relevant’ test
Ronpibon Tin NL v FCT (1949) 78 CLR 47:
“For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the
assessable income it must be incidental and relevant to that end...In brief substance, to come within the
initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing
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should be found in whatever is productive of the assessable income or, if none is produced, would be
expected to produce assessable income.”
Herald & Weekly Times - a newspaper publisher was allowed deductions for costs incurred in
defending/settling an action brought against it for alleged defamatory articles that had been published in
its newspaper. Unavoidable incident of publishing a newspaper.
W Nevill & Co v FCT – a company was allowed a deduction for amounts paid to one of its managing
directors in consideration of him agreeing to resign, where the payment was made for the purpose of
increasing the efficiency of the company and therefore increasing its income-producing capacity
Pre-commencement
Losses/outgoings which are preliminary to the commencement of an income- producing/business activity
are not incurred ‘in the course of’ such activity and are not deductible under general provision 8-1
Softwood Pulp & Paper – company incurred feasibility study and other costs to determine whether or
not to establish a new paper production mill. Ct held that the costs were NOT deductible as everything
that was done was preliminary to the commencement of an income producing activity/ business – did
not do anything to actually carry on the business.
Goodman Fielder Wattie – company was collaborating in a research project re development of
monoclonal antibodies. Ct denied deductions for its initial r&d expenditure on the project as its activities
were of a provisional kind only, taxpayer had not yet committed itself to the project nor made a final
definitive decision to do so
Steele – A woman borrowed money, bought land & wanted to build hotel on it, but the deal fell through.
Ct held the interest expenditure was deductible. Ct looked at: what did she do with the borrowed money?
Taxpayer had no plans to use the land for any purpose other than gaining assessable income.
Maddalena- re 1st positive limb, expenses to get new employment are not in the course of
gaining/producing assessable income. Football player who played for one club and was trying to get a
contract with another club, incurred expenses in travelling to 2nd club, payments to his manager to
negotiate on his behalf. Ct said expenses were not deductible as incurred at a point too soon.
Post-cessation (after termination)
May be deductible if the occasion of the loss/outgoing is found in business operations that were formerly
carried on by the taxpayer for the purpose of gaining assessable income. But generally expenditure
incurred in selling or winding up a business does not fall witin ‘carrying on a business’.
AGC (Advances) Ltd v FCT (1975) 132 CLR 175
Facts: Company restructured its business as a result of a scheme of arrangement & had subsequently
been taken over by another company. Deductions were allowed for losses incurred in relation to bad
debts arising from its previous business activities. A loss constituted by the writing off of a bad debt is
incurred at the time when the debt is written off (which may occur after the taxpayer has ceased to carry
on as a going concern the business in which the debt was created).
Held: taxpayer’s business had not been terminated at any relevant stage.
Look at ‘whether the occasion of the loss/outgoing could be found in the carrying on of the taxpayer’s
business’ for the purpose of producing assessable income.
Note: AGC declined to follow Amalgamated Zinc case.
** the less active the taxpayer is and the longer the period of inactivity continues = more likely that the
business will be treated as having terminated
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Placer Pacific Management Pty Ltd 95 ATC 4459
Facts: Several years after the taxpayer had sold its conveyor belt business, it incurred expenditure in
settling a customer dispute concerning a faulty conveyor belt it had supplied. The occasion of the
outgoing was to be found in the business operations directed towards the gaining/producing of
assessable income (doesn’t matter outgoing was in a year later than the year in which the income was
incurred, nor that in the meantime business in the ordinary sense may have ceased, the Division had
been sold & its active manufacturing business terminated.)
Held: The occasion of the loss/outgoing was the business arrangement entered into between
taxpayer/customer for the supply of the conveyor belt, and deduction was allowed.
“...provided the occasion of a business outgoing is to be found in the business operations directed
towards the gaining or production of assessable income generally, the fact that that outgoing was
incurred in a year later than the year in which the income was incurred and the fact that in the meantime
business in the ordinary sense may have ceased will not determine the issue of deductibility.”
FCT v Brown 99 ATC 4600
Facts: Taxpayer & wife borrowed money from bank to fund purchase of a deli business which they
operated in partnership. Subsequently sold the business but continued to pay interest on the loan, as the
sale proceeds were insufficient to discharge the outstanding debt.
Held: Allowed deduction and said the occasion for the interest payments was found in the loan entered
into by the partnership in carrying on its business for the purpose of producing assessable income, and
that the cessation of business did not operate to break the nexus between the carrying on of the business
and the incurring of the interest liability.
Jones 2002 ATC 413
Facts: Taxpayer & husband had taken out loans to acquire equipment used in a trucking business they
had carried on in partnership since 1967. After the husband died, the taxpayer returned to her former
employment as a nurse. In the meantime she continued to be liable to pay interest on an outstanding
loan from ANZ bank. A few years later, she refinanced the loan with another institution at a lower
interest rate.
Held: that the taxpayer was entitled to a deduction for the interest payments she incurred after cessation
of the partnership business when the husband died. Refinancing of the loan did not break the nexus
between the interest outgoings & the business. When an original borrowing is refinanced, the new
financing takes on the same character as the original borrowing.
Distinguish outgoings that relate to the ‘disposal’ of the bss – NOT deductible
Peyton v FCT (1963) 109 CLR 315 –
Facts: Sale of taxpayer’s hotel business. Taxpayer incurred certain outgoings.
Held: Not incurred in gaining/producing assessable income but in parting with the business, therefore
were not deductible.
To the extent
In some circumstances loss/outgoing may need to be apportioned, ie only partly deductible due to
negative limbs
Ronpibon Tin NL v FCT (1949) 78 CLR 47
Facts: Administrative expenses & directors fees paid by certain companies that had to close down their
mining operations in Siam and Malaya during WWII.
Held: Need to determine what proportion of the expenses were incurred in gaining assessable income.
The Court stressed that the Commissioner needs to make an actual apportionment. Not arbitrary.
Ure v FCT (1981) 11 ATR 484
Facts: Taxpayer borrowed money at commercial interest rates of up to 12.5% pa and on-lent the funds to
his associates (his wife and a family company) at a much lower non-commercial interest rate 1% pa. The
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funds were used to discharge mortgages on residential property beneficially owned by the taxpayer’s
company and to purchase a new family home. Ct took into account the taxpayer’ subjective purpose for
incurring the outgoing. Taxpayers interest expenditure was only partly deductible,
Held: Only allowed a deduction for so much of the interest expenditure he incurred that did not exceed
the interest income he received.
‘There was an air of unreality about the proposition that the borrowed moneys were laid out wholly for
the purpose of earning a return of 1% pa’
Contrast Janmor Nominees which involved related party transactions with commercial rates, where
court held interest expenditure was deductible.
Fletcher (1991) 173 CLR 1
Facts: taxpayers borrowed a large sum for a period of up to 15 yrs to purchase an annuity. Arrangement
was structured so that during the first 5 yrs of the scheme the interest outgoings would exceed the
annuity income (substantial losses), during the last 5 years the annuity income would exceed the interest
outgoings (substantial net income). Arrangement allowed taxpayers to terminate the scheme early.
Held: Ct said deductibility depends on whether the overall arrangement was expected to be terminated
before substantial amounts of assessable income began to be derived in the final years.
Second Positive Limb – ‘purposive approach’
This is concerned with the object of carrying on the business (i.e. relevant purpose of carrying on the
business must be the derivation of assessable income).
Snowden & Willson Pty Ltd (1958) 99 CLR 431 – ct allowed a company deductions for costs incurred in
defending itself before a royal commission investigating its business practices, and in placing newspaper
advertisements telling its side of the story to the public.
Magna Alloys & Research Pty Ltd 80 ATC 4542 – ct allowed a company deductions for legal expenses
incurred in defending its directors/agents against charges that they had received secret commissions.
Necessarily incurred doesn’t mean unavoidable or essentially necessary, what is required is that the
expenditure is appropriate and adapted for the ends of the business carried on for the purpose of earning
assessable income. The interests of the taxpayer were inextricably involved with those of its
directors/agents and it was plainly in the taxpayers’ own interests that the directors/agents be properly
represented.
Negative Limb: must not be Capital Expenditure
Tests:

Once & for all test – expenditure that is incurred once and for all is usually capital in nature,
whereas expenditure incurred regularly is usually revenue in nature
Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529
Facts: taxpayer owned and operated a rubber estate in Malaya & claimed deductions for its general
expenditure re estate eg, weeding, pest control, superintendence. Only one seventh of the trees were
producing rubber at the time.
Held: The ct allowed a deduction for the entire amount of the general expenditure as it was incurred on
items that the taxpayer would have to meet every year.

Enduring benefit test – where expenditure is incurred to bring into existence an asset of a lasting
nature, it is usually capital in nature
British insulated & Helsby Cables (1926) 10 TC 155Facts: Taxpayer established a pension fund for the benefit of its employees.
Held: Ct said the sum of 31,784 pounds which the taxpayer had spent to set up the fund, was of a capital
nature as it brought into existence an asset of ‘enduring benefit’

Business Entity test
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Sun Newspapers Ltd and Associated Newspapers Ltd of FCT (1938)
Facts: Sun Newspapers was a newspaper publisher that sold newspapers in Sydney. Taxpayer paid
instalments to a rival publisher agreeing to sell taxpayer its interest in a newspaper it was publishing ang
agreeing not to produce a rival newspaper for 3 years within 300m of Sydney.
Held: Taxpayer’s expenditure was of a capital nature as they strengthened and preserved the taxpayer’s
business organisation which taxpayer feared would be impaired due to competition from rival
Dixon J in Sun Newspapers: ‘The distinction between expenditure and outgoings on revenue account and
on capital account corresponds with the distinction between the business entity, structure, or
organization set up or established for the earning of profit and the process by which such an organization
operates to obtain regular returns by means of regular outlay, the difference between the outlay and the
returns representing profit or loss’
Need to look at the 3 relevant factors:
1. the character of the advantage sought – lasting qualities?
2. The manner in which the thing is to be used, relied upon or enjoyed – recurrence
3. The means adopted to obtain the thing – periodic payment for use or enjoyment for commensurate
period, or final payment so as to secure future use or enjoyment (do you pay for it over & over again or
once?)
Tutorial Questions
1. Identify the following features of the Fringe Benefits Tax (FBT) regime:
 Taxpayer: the legal entities who are liable to pay the tax and from whom unpaid tax can
be recovered – employer
 Tax base: the property, transaction, activity, or concept on which the tax is imposed –
how much the employee is getting from the employee (how much they pay for you)
 Tax period: the period in relation to which tax is paid
 Tax rate: may be single rate (eg. flat rate) or differing rates (eg. progressive rates)
1. FBT: highest marginal rate + 2% medical levy = not favourable for employers
because it is assumed that they have the maximum tax bracket because
employee is getting the benefit = paying less tax
2. Explain the underlying policy rationale for taxing the Employer?
o Not every employee gets fringe benefit
o High level of compliance – less employers than employees (simpler)
o Administrative advantage
3. Outline the key elements in the definition of a ‘fringe benefit’ in s136 of the Fringe Benefits Tax
Assessment Act 1986
o It is a benefit, provided during year of tax to employee/associate or by
employer/associate/arranger/person participating in or facilitating the provision or
receipt of the benefit in respect of the employment of the employee
4. How is an employer’s FBT liability calculated?
o 1. Determine if there is a fringe benefit
1. There is an employer-employee relationship where someone receives a benefit
solely because of their employment
o 2. Determine the taxable value
1. Identify type of benefit (eg. superannuation, taxi travel, minor benefits)
2. Identify any exceptions
3. Determine the taxable value of the benefit
4. Determine any reductions in the taxable value
o 3. Gross up taxable value
o 4. Calculate fringe benefits value
1. 2017/2018: 49%
2. 2016/2017: 47%
o Self-assessed when employers lodge FBT return at the end of each FBT year (beginning 1
April and ending 31 March)
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o
Must gross-up the taxable value of benefits that were provided to reflect the gross
salary employees would have to earn at the highest marginal tax rate (including
Medicare levy) to buy the benefits after paying tax
o Two gross up rates used to calculate fringe benefits taxable:
1. Higher gross-up rate (type 1) – used where employers/other benefit providers
are entitled to a GST credit for GST paid on benefits provided to an employee.
These benefits are known as GST-creditable benefits
2. Lower gross-up rate (type 2) – used where there is no entitlement to a GST
credit
5. Explain the underlying policy rationale for ‘gross-up’ of the aggregate amounts.
o Aggregate non-exempt amount – only for employers that provide benefits falling within
exemption in s57A, i.e. certain public/non-profit hospitals, public ambulance services
providers, health promotion charities, public benevolent bodies. Calculated as the sum
of the grossed-up value of benefits to each individual employee that exceeds certain
thresholds
o See if company is giving you amount of benefit – how much income you need to earn in
the equivalent amount to pay this benefit
1. Eg. $2000 ticket. Someone needs to earn $3050+ = as in able to afford the ticket
if they have to pay it themselves
6. Explain the effect of s23L(1) and 23L(1A) of the Income Tax Assessment Act 1936.
o See 23L(1) ITAA36: fringe benefits are NANE income (to the employee)
1. Not in assessable income but must be reported
o See 23L(1A) ITAA 36 – exempt benefits are exempt income (to the employee)
1. Does not need to be reported
o FBT/the cost of benefits is generally deductible to employer under s8-1 ITAA97
o Generally, GST is not paid on supplies that constitute the provision of fringe benefits
unless a ‘recipient’s contribution’ is involved
o So, these will not be included
7. Where do deductions fit in to the calculation of a taxpayer’s income tax payable? Explain your
answer by reference to any relevant legislative provisions and principles of tax law.
o In ITAA97, s4-15, taxable income = assessable income – deductions
o Individuals can claim deductions for work-related expenses incurred while performing
the job as an employee. It is incurred when:
1. A bill or invoice for an expense is received that they are liable for and must pay
2. Do not receive a bill or invoice but individual is charged and must pay for the
expense
8. What are the ‘positive’ and ‘negative’ limbs of s8-1 ITAA97?
S 8-1 Two Positive Limbs
You can deduct from your assessable income any loss or outgoing to the extent than:
o It is incurred in gaining or producing your assessable income; or
o It is necessarily incurred in carrying on a business for the purpose of gaining or
producing your assessable income
S8-1 Four Negative Limbs
However, you cannot deduct a loss or outgoing under this section to the extent that:
o It is a loss or outgoing of capital, or of a capital nature; or
o It is a loss or outgoing of a private or domestic nature; or
o It is incurred in relation to gaining or producing your exempt income or your nonassessable non-exempt income; or
o A provision of this Act prevents you from deducing it
9. Explain the difference between a ‘loss’ and ‘outgoing’.
o Loss - taxpayer’s financial resources have been diminished, eg. taxpayer’s money has
been stolen (Charles Moore & Co (WA) Pty Ltd (1956) 95 CLR 344) write off bad debts
(AGC (Advances) Ltd v FCT (1975) 132 CLR 175)
59
o
Outgoing- usually involves some form of payment, outlay or expenditure, or the
taxpayer is committed to spend money eg, has received invoice
10. What is the ‘incidental and relevant’ test regarding s8-1? Make sure you refer to any relevant
cases in your answer.
o That is, it has to be ‘in the course of’ employment
o Ronpibon Tin NL v FCT: incidental and relevant  both sufficient and necessary that the
occasion of the loss or outgoing should be found in whatever is productive of the
assessale income, or if none is produced, would be expected to produce assessable
income
o Herald & Weekly Times: incidents that occur when publishing a newspaper (as a
newspaper publisher)  considered to be incidental and relevant
o W Nevill and Co: payment was made for purpose of increasing efficiency of company
o Nexus/connection to your business
11. Explain the effect of s8-10 ITAA97.
 No double deductions: Where a loss/outgoing may be deductible under more than one
provision, use the most appropriate provision.
 No double deductions
Question 1
John is an auditor who is employed full-time by a large firm. John’s employer provides him with a Toyota
car with a lease value of $45,000, as part of his salary package. Each night the car is garaged at John’s
house. The lease costs are $800 per month. The other running costs including registration, insurance,
tyres, fuel etc are $400 per month. Assume the car travelled 30,000 km during the year, of which 7,500
km was on business. Assume this is a Type 1 fringe benefit.
 Car lease value = $45,000 (A)
o Base value can be increased by any physical assets
 Garaged = 365 private days (C)  check if leap year (366 days)
o As long as the car is parked in her garage (or anyone else’s garage) still 365
 Lease costs = $800 per month
 Other running costs: $400 per month
a) Which method of calculating the taxable value of the car fringe benefit is likely to produce a
more favourable outcome for John’s employer? Show your working.
a. Statutory formula method:
(AxBxC)/D) – E
((45,000 x 0.2 x 365)/365) – 0
= 9000
Gross up (multiply by 2.0802 – type 1 fringe benefit)
9000 x 2.0802 = 18,721.8
FBT payable = 18,721.8x47% (FBT rate) = $8799.25
b. Operating costs method
Operating costs = (lease costs + other running costs) x months
($800+$400) x 12 = 14400
7500/30,000 = 0.25
Taxable value of car fringe benefit:
= [C x (100%-BP) – R]
= 14400 x 75% - 0
= 10800
Gross up (multiply by 2.0802 – type 1 fringe benefit)
10800 x 2.0802 = 22,466.16
FBT payable = 22,446.16 x 47% (FBT rate) = $10,559.10
He will receive more benefit through the statutory formula method.
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b) How (if at all) would your answer be different if the car travelled 10,000 km on business, out of
the 30,000 km travelled during the year?
a. Statutory formula method:
(AxBxC)/D) – E
((45,000 x 0.2 x 365)/365) – 0
= 9000
Gross up (multiply by 2.0802 – type 1 fringe benefit)
9000 x 2.0802 = 18,721.8
FBT payable = 18,721.8x47% (FBT rate) = $8799.25
b. Operating costs method
Operating costs = (lease costs + other running costs) x months
($800+$400) x 12 = 14400
10,000/30,000 = 0.33
Taxable value of car fringe benefit:
= [C x (100%-BP) – R]
= 14400 x 67% - 0
= 9648
Gross up (multiply by 2.0802 – type 1 fringe benefit)
FBT payable = 9648 x 67% = 6464.16
He will receive more benefit through the statutory formula method
c) If John made personal contributions for the car, what impact would this have on the taxable
value of the car fringe benefit?
a. If he made personal contributions, the taxable value would reduce
Question 2
Kate, an auditor working in Sydney, borrowed $4 million to purchase a large waterfront property in the
suburb of Byron Bay. Her annual interest expenditure on the loan was $300,000. Kate wanted to
purchase the property for her retirement. She plans to retire in several years time. She is very particular
and does not want tenants living in the property in the interim. However, she allows her 25 year old
daughter Kim (who works part-time as a tour guide in Byron Bay) to live in the property in consideration
of rental payments of $50 per week paid by Kim, to Kate. (The commercial rental for the property is over
$2,000 per week.)
a) Advise Kate as to deductibility of the interest expenditure on the loan.
a. Needs to satisfy 2 positive limbs and none of the 4 negative limbs
b. Positive limbs: satisfies (1)(a) – ‘incurred in gaining or producing your assessable income’
c. Negative limbs: satisfies (2)(b) – ‘loss or outgoing of a private or domestic nature’ (since
her daughter is paying considerably less regarding commercial rental for property)
d. Therefore, it is not deductible
b) How would your answer be different if Kate had purchased the property as a rental
property/long-term investment and rented it out to tenants?
a. Needs to satisfy 2 positive limbs and none of the 4 negative limbs
b. Positive limbs: satisfies (1)(a) – ‘incurred in gaining or producing your assessable income’
c. Negative limbs: does not satisfy
d. Therefore, it is deductible
(eg. FBT can be the difference of an interest rate – market share and received rate)
Scenario 1 – $100,000 provided by employer: employee invests half in shares, half to pay off car
It is deductible – if the outgoing expense is deductible as a deduction = it is not a fringe benefit
Fringe benefit is only on $50,000 = 50% for share as investment – the interest on the loan will be
deductible. If the outgoing expense is deductible as a deduction, it is NOT a fringe benefit.
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
A benefit is ‘Otherwise Deductible’ if the employee would have been entitled to claim an income
tax deduction if the employer had not paid for the expense
Scenario 2 – if the employer does not expect to be paid back – it is a fringe benefit (debt waiver).
Question 3
ShoeCo Ltd is a company that sells expensive, high quality, leather shoes. During the 2017/2018 income
year, ShoeCo Ltd incurs the following losses/outgoings:
Advise ShoeCo Ltd as to whether it can claim the above losses/outgoings incurred, as deductions in the
2017/18 income year.
 $500,000 for the purchase of trading stock
o Outgoing – commitment of expenditure
 $200,000 wages paid to employees
o Outgoing – commitment of expenditure
 $20,000 rent paid to occupy retail premises in a shopping centre
o Outgoing – commitment of outlay
 $20,000 in bad debts written off (the debts arose from ShoeCo Ltd’s former business operations
selling handbags)
o Loss – financial resources are diminished
 $40,000 in legal expenses incurred in defending one of its directors against charges of
misconduct
o Loss – financial resources are diminished
o Carrying on a business – deductible under second limb (not necessary but unavoidable)
 $40,000 paid to a rival shoe seller in consideration of the rival agreeing not to sell shoes in the
same shopping centre as ShoeCo Ltd
o Loss – financial resources are diminished
o This is avoidable – company paid for sake of carrying on the business – it is of capital
nature, not an expense of outgoing nature  not a deduction
 $30,000 on a feasibility study to determine whether to establish another shoe store in the
suburb of Mosman
o Outgoing – commitment on expenditure
o Not deductable – happened before you generated any income, if you want to use it as a
deduction, needed to have income to offset it (no nexus between outgoing and income
because NO INCOME)  need to have income to offset
Negative limb: Loss/outgoing of a private or domestic nature
A loss/outgoing of a “private or domestic nature” may not be deductible because it doesn’t satisfy either
of the positive limbs, or it is not deductible under the second negative limb s8-1(2)(b)
Lunney v FCT – look at essential character of the loss/outgoing, insufficient that loss/outgoing is an
essential prerequisite to the derivation of assessable income
Lodge v FCT – court denied deductions to a law clerk for childcare expenses to have her child minded so
she could attend work, neither relevant nor incidental to the activities by which the taxpayer gained her
assessable income
Fullerton v FCT – expenses incurred by a taxpayer in moving with his family to a new home in another
city because his job was relocated, were not deductible as these related to a domestic or family
arrangement
Clothing expenses
Costs of acquiring ordinary items of clothing eg, a suit, are generally NOT deductible under s8-1
Mansfield v FCT:
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“It can be said that generally expenditure on ordinary articles of apparel will not be deductible,
notwithstanding that such expenditure is necessary to ensure a suitable appearance in a particular job or
profession. An employed solicitor may be required to dress in an appropriate way by his or her employer,
but that fact alone would not bring about the result that the expenditure was deductible.”
Exceptions:
 Compulsory uniforms
 Protective clothing eg, construction worker’s hardhat
 Occupation-specific clothing eg, nurse’s uniform
 Statutory restrictions Div 34
Mansfield v FCT – court allowed a flight attendant to claim deductions for the cost of her shoes (which
were required to be larger than normal, due to cabin pressure) and the cost of her stockings (which often
laddered due to the confined spaces in which she worked).
FCT v Edwards – taxpayer was personal secretary to Governor of Queensland’s wife and was required to
accompany her on official occasions, attending more than 150 public engagements throughout the year
where she was required to dress appropriately. She often had to change her clothes several times a day.
Court allowed deductions for the cost of additional clothing (hats, gloves, formal evening wear) required
for her job.
Morris v FCT – taxpayers engaged in outdoor occupations eg, surveyor, builder, physical education
teacher, professional tennis umpire, allowed deductions for the cost of sun protection items eg, sun hats,
sunglasses, sunscreens – considering the environment that they worked and the nature of their work
Travel expenses
Travel ‘to work’
Lunney v FCT - Travel between home and a person’s usual place of work is generally not
deductible
vs
Travel ‘on work’ (in the course of work) eg, travelling salesman, self-employed builder travelling to give
quotes
FCT v Wiener – a teacher employed by the Education Department was required to teach between five
different schools during the week. Court found the taxpayer’s employment was inherently itinerant and
that she was travelling in the performance of her duties from the moment she left home to the moment
she returned. Ct allowed deductions for travel between schools and also travel between home and the
first and last school she attended each day.
FCT v Payne- court denied a taxpayer deductions for cost of travelling between his home (where he
operated a deer farm business) and the airport (where he worked as a pilot). Court said that travelling
between two unrelated places of work is generally not deductible under s8-1.
Legislative response : s25-100 ITAA97 allows deductions for the cost of travel between workplaces.
Travel must be directly between two places where income- producing activities are carried on, and
neither place is the taxpayer’s home.
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Self-education expenses
Self-education expenses are generally deductible where incurred to maintain/increase a taxpayer’s skills
in an occupation in which the taxpayer is currently engaged, especially where the expenditure enhances
taxpayer’s prospects of promotion/earning greater income
Examples of self-education expenses:
 Cost of registration, travel to and accommodation at professional conferences
 Cost of course fees for undertaking tertiary course
 Cost of study-related materials eg calculators, textbooks, stationery (note: does not include
capital expenditure such as purchasing a computer)
 See also tr 98/9
Note: Self-education expenses relating to an occupation that a taxpayer is not presently engaged in are
generally not deductible because the nexus test is not satisfied, eg, medical student not yet practising as
doctor, expenses re study to enable a taxpayer to get employment, to obtain new employment or to open
up a new income-earning activity (Maddalena) are generally not deductible
 A skilled person (either employed/self-employed) undertaking a ‘refresher’ course in their field
to maintain their level or knowledge or if they are increasing their qualifications in the same field
of expertise (FCT v Highfield) this will be deductible
FCT v Finn- architect employed by WA Govt was allowed deductions for expenses incurred in travelling
overseas for nearly one year to study architecture. He made voluminous notes, photographs, sketches,
reports during his trip. Court held the tour was incidental and relevant to his employment. His
advancement was more certain as a result of the trip, he had motives of career advancement and higher
pay, and devoted all of his time to increasing his knowledge. Part of his trip was at the request of his
employer.
“a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs
expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession
or calling necessarily incurs those expenses in carrying on his profession or calling”
FCT v Highfield - dentist who carried on general practice was allowed deductions for expenditure
including course fees, travel and accommodation expenses relating to undertaking a Master of Science in
Periodontics degree in London, that would enable him to perform more periodontic work in his general
practice and allow him to specialise and to charge higher fees for his services. Court found that the
expenditure was necessarily incurred in carrying on his business because the purpose in undertaking the
degree was to use the knowledge he obtained in the advancement of his practice.
FCT v Studdert – court allowed deductions to a flight engineer for the cost of undertaking flying lessons
that would improve his performance in his current job and increase prospects for promotion.
“Where an outgoing is shown to contribute or to be likely to contribute to increased income, it will
normally be the case that the necessary connection will exist between the outgoing and the activities of
the taxpayer which more directly contribute to the gaining or production of assessable
income...However, it is not necessary for an outgoing to be deductible that a taxpayer be able to show a
likelihood of increased income.”
Anstis – court looked at whether a full time student who was undertaking a teaching degree and who
received assessable ‘Youth Allowance’ payments from Cth Govt was allowed deductions for her selfeducation expenses, eg, textbooks, student administration fees, travel expenses in visiting schools where
she had teaching rounds, supplies for students during teaching rounds. The Youth Allowance was payable
if a person could establish they were enrolled in a course at an educational institution, undertaking at
least three quarters of normal full time study, making satisfactory progress towards completing the
course. Court allowed the taxpayer deductions for these expenses on the basis they were incurred in the
course of establishing or retaining her statutory right to payment of the Youth Allowance.
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Legislative Response s26-19
Outgoings incurred for the genuine purpose of acquiring or maintaining knowledge and skill in a vocation
do not become an outgoing of a ‘private nature’ simply because the taxpayer got pleasure and
satisfaction in increasing his knowledge and attainments”
Self-education expenses: statutory provisions
 s26-19 ITAA97 denies deductions from 1 July 2011 for self education expenses that relate to
gaining ‘rebatable benefits’ ie certain assessable govt assistance payments such as Youth
Allowance, Austudy Living Allowance, Newstart Allowance.
 S26-20 ITAA97 denies deductions for certain study-related payments (HELP loan repayments)
 S82A ITAA36 denies deductions for the first $250 of ‘expenses of self-education’
Home office expenses


‘Occupancy expenses’ eg rent, interest, rates, insurance premiums
‘running expenses’ eg, heating/cooling, lighting, depreciation
Tr 93/30
 Where the home office is a ‘place of business’ a relevant proportion of both kinds of expenses
may be deducted
o It needs to be a designated place in your home that you use for business-purposes ONLY
 Where the home office is simply used ‘in connection with taxpayer’s income-earning activities,
but does not have the character of a place of business’ only a relevant proportion of the running
expenses may be deducted.
o (see also ps la 2001/6 practice statement)
o You estimate % and claim on electricity/rent/internet/running-expense, or 45c per hour
(if you use this, cannot claim depreciation or anything etc) based on the number of
hours you do at home.
 Taxpayers are generally entitled to deductions for work-related proportion of heating and
electricity costs
 Taxpayers can generally depreciate cost of items such as desks, bookshelves used at home for
work purposes
Handley v FCT – barrister who had home study where he worked 20 hrs per week was denied deductions
for interest paid on his home loan as well as rates and insurance premiums relating to the premises.
Barrister also maintained his own chambers/office in town.
FCT v Forsyth – barrister who paid rent to the trustee of his family trust which owned the family home,
was denied deductions for the rent that related to his home study. Court looked at the fact that he only
used the study for convenience not through compulsion, and on this basis considered that the rent was
not incidental or relevant to gaining/producing his assessable income. Barrister also maintained his own
chambers/office in town. The study was used merely for ‘convenience’.
Swinford v FCT – a self-employed scriptwriter was entitled to deductions for a portion of the rent paid in
relation to her flat, where she dedicated a separate room in the flat for use as her study. She wrote her
scripts in this room and did not have separate business premises.
“This was the only place where she did carry out her writing activities. This was the base, and the only
base, of the taxpayer’s operations”
Legal and other professional expenses
 Legal expenses associated with proceedings for the recovery of outstanding debts arising from
goods sold in the ordinary course of business = deductible
65



Legal expenses associated with the acquisition of land and buildings used as factory premises =
not deductible
Legal expenses relating to matters involving protecting a taxpayer from competition = capital =
not deductible
Legal expenses of defending the taxpayer’s reputation before a Royal Commission = deductible
(even though the expense was ‘abnormal’ and ‘not recurrent’
Types of specific deduction provisions




Confirm the operation of s8-1, eg, Repairs s25-10, Bad Debts s25-35
Extend the operation of s8-1, eg, Travel between workplaces s25-100, Uniform Capital
Allowances Div 40, Capital Works Allowances Div 43
Deny deductions otherwise available under s8-1
Impose additional requirements re s8-1 deductibility, eg, substantiation provisions Div 900,
substantiation of car expenses Div 28, non-compulsory uniforms Div 34
S25-35 BAD DEBTS
GE Crane case
 Debt must exist at the time it is written off
 Debt must be bad (not just doubtful)
 Debt must have been: previously brought to account in taxpayer’s assessable income, or in respect of
money lent in ordinary course of business of moneylending
 Debt must be written off during the year of income
See also Subdiv 20-A recovery of debts previously written off
See also TR 92/18
S25-10 REPAIRS, S25-10 ITAA97
“(1) You can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating
asset that you held or used solely for the purpose of producing assessable income.
Property held or used partly for that purpose
(2) If you held or used the property only partly for that purpose, you can deduct so much of the
expenditure as is reasonable in the circumstances.
No deduction for capital expenditure
(3) You cannot deduct capital expenditure under this section.”
Repairs vs. capital expenditure
S 25-10 = a deduction for expenditure for repairs to premises, plant, machinery, tools or articles held or
used for the purpose of producing assessable income –maintain those items in good operating condition
 Is it a repair or alternatively is it a reconstruction or improvement?
 Repair = restoring an asset to its previous condition without changing its essential
character/function. The aim is to make good the deterioration through wear & tear. It can
involve renewal/replacement of a part of an item, rather than the entirety (Lurcott v Wakely and
Wheeler) – has to be in need of restoration
o Lindsay: slipway in shipyard was entirety = no deduction
 TR 97/23:
o Property is more likely to be an entirety if:
 It is separately identifiable as a principal item of capital equipment, or
 Capable of functioning without regard to any other part of the premises
o Property is more likely to be PART of an entirety if:
 It is an integral part of some larger item
 It is physically, commercially and functionally an inseparable part of something
else
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
Non-deductible capital repairs falls into 3 categories:
o Additions: made to an existing asset (eg. extension made to a factory) – so basic capital
structure, and no deduction
o Improvements: involves making an item functionally better than it originally was – only
deductible – has the operating efficiency been significantly improved?
FCT v Western Suburbs Cinema:
Facts: Cinema’s ceiling was originally constructed of tin sheeting. It had become worn over time, and
replaced with ceiling of fibro sheeting. This gave the ceiling a number of advantages and significant
reduction in need of repairs for the future
Held: A non-deductible improvement,
Rhodesia Railway Ltd: replacement of wooden railway sleepers by steel sleepers = repair, not an
improvement
o Initial repairs: expenditure incurred to remedy defects, damage or deterioration already
present when property is acquired is characterised as a ‘capital initial repair’ which is not
deductible under s25-10
Capital Allowance Regimes

2 main capital allowance regimes:
o Uniform capital allowances Div 40
o Capital works allowances (building depreciation) Div 43
DIV 40 CAPITAL ALLOWANCES
40-25(1) an entity can deduct an amount equal to the ‘decline in value’ for an income year of a
‘depreciating asset’ that it ‘held’ during the year
40-25(2) Deduction reduced where asset’s decline in value attributable to its use for a purpose other
than a taxable purpose
Example: Ben holds a depreciating asset that he uses for private purposes for 30% of his total use in the
income year.
If the asset declines by $1,000 for the year, Ben would have to reduce his deduction by $300 (30% of
$1,000).
s40-30
depreciating asset = “an asset that has a limited effective life and can reasonably be expected to decline
in value over time”
Exceptions:
- Land
- Trading stock
- Most intangible assets
- Exceptions include: intellectual property; in-house software Note: purchased goodwill = not a
depreciating asset
“plant” - includes ‘articles, machinery, tools and rolling stock (s45-40) “holder” – concept of economic
ownership
Note: Div 40 does not apply to depreciating assets where:
- Used in R&D activities
- Associated with investments in Aust films
- Associated with certain International Telecommunications Submarine Cable Systems (IRUs)
- Cars – where certain substantiation methods have been used Capital works under Div 43
Decline in value of a depreciating asset commences from the ‘start time’ (which is usually the time when
the entity first uses the asset or has it installed ready for use 40-60)
An entity can choose (40-65) to calculate the decline in value of a depreciating asset using:
Diminishing value method (40-72) or
Prime cost method (40-75)
67
(Can use different methods for different depreciating assets, however once you have chosen a particular
method for a particular depreciating asset the method cannot be changed for that particular depreciating
asset)
Note: where cost does not exceed $300 decline in value will be asset’s cost s40-80(2)(note ‘set’ rule
which may apply where purchasing several assets as part of one transaction)
How to calculate decline in value
Prime Cost Method
 s40-75(1)
o Asset’s cost x Days held/365 x 100%/ Effective Life
Diminishing Value Method
 s40-72 – Post 9 May 2006 assets
o Base value x Days held/365 x 200%/Effective life
Example
On 1 July 2016, Sarah paid $12,600 (GST exclusive) for a new piece of equipment for her business. The
equipment is used 80% for a taxable purpose and 20% for private purposes. The equipment has an
effective life of five years.
Prime cost method
Decline in value =$12,600 x 365/365 x 100%/5 = $2,520
To determine the deduction for decline in value, reduce to take into account the fact equipment is used
80% for taxable purpose and 20% for private purposes. Deductible amount = 2,520 x 80% =$2,016
Diminishing value method
Decline in value = $12,600 x 365/365 x 200%/5 = $5,040
To determine the deduction for decline in value, reduce to take into account the fact equipment is used
80% for taxable purpose and 20% for private purposes. Deductible amount = 5,040 x 80% = $4,032
Provisions that deny deductions otherwise available under s 8-1










GST input tax credits s27-5
Entertainment expenses Div 32
Relative’s travel s26-30
Leisure facility/boat s26-50
Indictable offences s26-54
HECS/Student Assistance s26-20
Penalties/Fines s26-5
Leave Payments s26-10
Rebatable benefits s26-19
Non-commercial business losses Div 35
Tutorial Questions
1. Outline the court’s reasoning in the Anstis decision. What was the legislative response to the
Antstis decision?
a. Facts: Anstis claimed deducions of: expenses of self-education. The Commissioner
disallowed some deductions. Three questions:
i. Whether youth allowance is assessable income under the 1997 Act
ii. Whether the respondent’s self-education expenses were incurred ‘in gaining or
producing’ her assessable income
iii. Whether, if the expenses were so incurred, they were nonetheless to be
disallowed as being of a ‘private nature’
68
2.
3.
4.
5.
6.
7.
b. Issue: whether certain expenses incurred by a student undertaking university studies by
be deducted under s8-1 of the Income Tax Assessment Act 1997 from the assessable
income of that student as a recipient of a ‘youth allowance’ payment.
c. Held: the income was assessable, the expenses claimed were deductible and not of a
‘private nature’ and the appeal should be dismissed with costs
d. Legislative response: s26-19: Outgoings incurred for the genuine purpose of acquiring or
maintaining knowledge and skill in a vocation do not become an outgoing of a ‘private
nature’ simply because the taxpayer got pleasure and satisfaction in increasing his
knowledge and attainments” – related to all claims (rebatable benefit allowance)
Consider the Payne case and outline the legislative response to that decision
a. Court denied a taxpayer deductions for cost of travelling between his home (where he
operated a deer farm business) and the airport (where he worked as a pilot. Court found
that travelling between two unrelated places of work is generally no deductible under
s8-1.
b. Legislative response s25-100 ITAA97: allows deductions for the cost of travel between
workplaces. Travel must be directly between two places where income-producing
activities are carried on (not the taxpayer’s home)
i. Travel from workplace to client workplace is NOT deductible
ii. Or if you drive equipment around to workplace is NOT deductible – unless it is
from home and you constantly carry it around
iii. Another exception is on-call duty
iv. From income-earning places during office hours (workplace A to workplace B)
Outline the elements of s25-35, ITAA97
For bad debts:
a. Debt must exist at the time it is written off: needs to be recorded as income in the first
place, when in invoice
b. Debt must be bad (not just doubtful): must be 100% sure that the client will not pay you
c. Debt must have been: previously brought to account in taxpayer’s assessable income, or
in respect of money lent in ordinary course of business of moneylending:
d. Debt must be written off during year of income
Explain the nature of a ‘repair’
a. Repair = restoring an asset to its previous condition without changing its essential
character/function. The aim is to make good the deterioration through wear & tear. It
can involve renewal/replacement of subsidiary parts of a whole but generally not
reconstruction of the entirety.
i. Difference to capital expenditure: when purchase (eg. home) needs a repair:
initial repairment is capital expenditure = capital nature and will depreciate it
ii. Repair must maintain the same level of repair = not improvement (which is not
deductible)
iii. FROM ATO: Cannot claim capital expenses such as:
1. Substantial improvements to an item or property
2. Repairs made to machinery, tools or property immediately after you
purchase or acquire them
Give 3 examples of specific statutory provisions that deny deductions. Explain how these
provisions interact with s8-1, ITAA97
a. Penalties/Fines s26-5
b. HECS/student assistance s26-20
c. Leave payments s6-10
d. The company’s p&l and financial statements will vary due to these
What are the 2 main capital allowance regimes in ITAA97?
a. Uniform capital allowances: DIV40: assets, moveable, detachable, diminishing value
method and diminishing value method
b. Capital works allowances: DIV 43 - purely for building, never depreciate land
How do you calculate the decline in value of a depreciating asset under Div 40, ITAA97?
69
a. Prime Cost Method s40-75(1) – standard figure every year
i. Asset’s cost x Days held/365 x 100%/ Effective Life
b. Diminishing Value Method s40-72 – Post 9 May 2006 assets – higher depreciation in the
first couple of years although will be the same if effective life is the same (depends on
what taxpayer wants to do, if they want more deduction in first couple of years)
i. Base value x Days held/365 x 200%/Effective life
Question 1
Joe is a self-employed builder who specialises in renovating residential properties. During the week he
travels from home to the various building sites where he works. He usually works at up to three different
sites per day. During the current year, he purchases a new hard hat for $200, to protect himself from
injury on site. He also spends $700 on sunscreen to wear at work as he is often out in the sun.
Joe is very hardworking and on the weekends, he also visits potential clients in their homes in order to
give quotes for potential renovation work.
Although Joe enjoys working as a builder, he has started to suffer from a sore back, and he wants to
become an engineer in the future as he believes this would involve less physical labour. He undertakes a
part-time engineering course at university. He incurs $8,000 in university fees and he spends $500 on
textbooks in the current year.
Advise Joe as to the deductibility of the losses/outgoings incurred, in relation to the above facts.
 Two Positive limbs: satisfies s8-1(b) – necessarily incurred in carrying on a business for the
purpose of gaining or producing your assessable income
 Travel to work:
o Non-deductible (Lunney v FCT) because he travels from home to the various building
sites. Unless he carries his work equipment or on call
o Deductible where he travels in between houses that he does PHYSICAL work from (so
not home to A, but A to B is deductible)
 Hard hat: $200 – protective clothing is deductible (Morris v FCT)
 Sunscreen: $700 – occupation-specific
 Travels to give potential clients quotes: ‘on work’, deductible (FCT v Payne)
 University and fees: $8500 non-deductible (FCT v Finn) as it is not related to his current job (the
nexus test is not satisfied) (Maddalena)
Question 2
Jack is an accountant who lives in Sydney with his wife, Jill who is a writer. She writes historical fiction
and has had several novels published successfully over the last couple of years.
In July 2017, Jack resigned from his job at the accounting firm, and started a new deli business, selling
salami, ham, prosciutto, frankfurts and other cured meats. He borrowed $1 million for a term of 10 years
at an interest rate of 10% per annum.
 He used $700,000 of the borrowings to purchase the goodwill and equipment of the new
business.
 He on-lent the remaining $300,000 to Jill at an interest rate of 1% per annum.
o Jill used $250,000 to renovate her holiday home in the Blue Mountains, and
o $50,000 on a trip to Wiltshire in England to undertake a comprehensive study of the
prehistoric monument ‘Stonehenge’ which she is currently writing about.
She plans to use the insights gained from visiting the site of ‘Stonehenge’, to cultivate a more authentic
writing style and to finish writing her novel about ‘Stonehenge’, which she hopes will be published
commercially. She takes many photographs of ‘Stonehenge’, makes extensive notes, and writes chapters
of her novel while on her trip.
Jack’s deli business was unsuccessful due to an unforeseen decline in demand for processed meats,
following the publication of new research linking processed meats to bowel diseases. Jack sold the
business at a loss. The sale proceeds were insufficient to discharge his loan. As a result, Jack continues to
pay interest on the loan, despite the fact that he has now returned to work in his former occupation as
an accountant at the accounting firm.
70
a. Advise Jack and Jill as to what deductions they may be able to claim, based on the above facts.
i.
Jack:
i. $1m and 10% interest. Interest is the expense. But he did not use all of it for his
business, only $700,000. So only the interest on the $700,000. Everything that
he lent s8-1
ii. Interest of mortgage on $700k even if business is finished – still deductible, case
of Brown in week 7 deduction 1
ii.
Jill
i. $250,000 she spent on her holiday home (not receiving any income) – not
deductible
ii. $50,000 on a trip to England. This is deductible because it is related to her
occupation
b. Consider the following additional facts:
Upon returning to his former occupation as an accountant, Jack attends a Professional Accountants’
conference in Melbourne. Jack’s wife, Jill accompanies him on the trip to Melbourne. In relation to the
conference, he pays conference fees of $700. He also incurs $300 in air travel expenses for himself (and
another $300 in air travel expenses for Jill). He pays $800 for their accommodation. During the trip, Jill
goes shopping and visits the zoo, while Jack attends the conference.
Advise Jack as to whether he can claim the above expenses as deductions.
 Conference fees $700 – deductible
 $300 air travel expenses for himself – deductible
 $300 air travel expenses for Jill are not deductible as it is considered relative’s travel s26-30
 $800 for accommodation: this cannot be halved, so not deductible since Jill’s share is included
Question 3
Tom recently returned to his home in Sydney, after receiving an angry phone call from his father who
demanded that Tom return home after having spent twelve months abroad, sightseeing and travelling
around the world. Tom is currently unemployed and he is receiving government assistance payments in
the form of the Newstart Allowance.
In order to receive this payment, recipients are required to actively seek employment. For this purpose,
during the current year Tom purchases newspapers for $250 and high speed internet access for $900,
and incurs expenses of $1,000 for travel in relation to attending job interviews. He also spends $1,000 on
new suits & ties, and $500 on sophisticated haircuts in order to improve his overall presentation.
Tom has not yet been successful in securing a job, as the economy has slowed down significantly during
the current year.
a) Advise Tom regarding the deductibility of the above expenses
a. Newspapers: $350 – generally not deductible
b. Internet: $900 – generally not deductible
c. Travel in relation to job interviews: $1000 – generally not deductible
d. Attire: $1000 – generally not deductible
e. $500 on haircuts – generally not deductible
f. All are generally not deductible because the nexus test is not satisfied - as long as he is
receiving rebatable benefit
b) How (if at all) would your answer be different if Tom was successful in getting a job during the
year?
a. The expenses were before he got the job, so it would still not be deductible
(Maddalena). The nexus test is not satisfied.
Question 4
On 1 July 2016, Jane paid $30,000 (GST exclusive) for a new piece of equipment for use in her advertising
business. The equipment has an effective life of six years. Jane uses the equipment 75% for her
advertising business, however the equipment is also used 25% by her sister Jodi for private purposes.
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Advise Jane on deductibility regarding the decline in value of the equipment in the 2016/17 income year.
Make sure that you show your calculations and refer to any relevant legislative provisions and principles
of tax law.
Prime cost method: asset’s cost x days held/365 x 100%/effective life
= 30,000 x 365/365x1/6 = $5000 (depreciation)
But also used 25% for private purposes = 5000 x 75% = 3750 (deduction)
Diminishing value method: base value x days held/365 x 200%/effective life
= 30,000 x 365/365 x 2/6 = 10,000 (depreciation)
But also used 25% for private purposes = 10,000 x 75% = 7500 (deduction)
Opening value for year 2: 30,000 – 10,000 = 20,000 (base value for year 2)
Depreciation is 20,000 x 365/365 x 2/6 = 6,666.7 (depreciation) x 75% = 5,000 (deduction)
Question 5
Pete has recently completed a postgraduate degree in Medicine and has taken up employment in a
hospital in rural New South Wales, in Orange. During the 2016/17 income year, Pete incurred the
following losses/outgoings:
Advise Pete as to whether he can claim the above losses/outgoings incurred, as deductions in the
2016/17 income year.
 $400 on airfares to travel to Orange for the job interview (prior to receiving the job offer)
o Not deductible as no nexus
 $4,000 in relocation costs in moving house from Sydney to Orange
o Non-deductible (Fullerton case)
 $600 for the purchase of a compulsory surgeon’s uniform to wear at work
o Deductible (occupation-specific clothing, compulsory uniform)
 $900 on organic kale smoothies for breakfast to prepare him for a long day of surgery
o Not deductible
 $1,000 in speeding fines incurred on the way to work
o Not deductible Penalties/Fines s26-5
 $800 on travel to and from work
o Non-deductible (Maddalena case) as it is from home
 So only $600 is deductible
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Tax accounting, trading stocks + SBE’s
Context
s4-10(1) – tax period
Income tax must be paid for each ‘financial year’
S4-15
Taxable income = Assessable Income – Deductions
‘Tax Accounting’ – Timing issues
“Tax accounting” involves the process of allocating income and deductions to a particular year
In which income year, do we include an amount in a taxpayer’s assessable income/ allowable deductions?
 “When” questions:
o When is income derived for tax purposes? S6-5
o When is an expense incurred for tax purposes? S8-1
Ordinary income vs statutory income

ordinary income is included in assessable income when it is ‘derived’ by a taxpayer s6-5(2), (3)

statutory income is included in assessable income at the time set out by the specific statutory
provision including the amount in assessable income
vs
When is income ‘derived’?
Gibbs J in Brent v FCT
Tax legislation “does not define the word ‘derived’ and does not establish a method to be adopted as a
general rule to determine the amount of income derived by the taxpayer.”
In the absence of any specific statutory provision, the derivation of income is determined “by the
application of ordinary business and commercial principles”
Tax Accounting Methods



Receipts and Outgoings
o Cash
o Accruals
Net Profit/Loss Accounting
Statutory Regimes
o eg, Advance payments
o Division 70 (trading stock)
o Discounted and deferred interest securities
o TOFA
Receipts and outgoings: cash vs. accruals
1) Cash
income is derived when cash/cash equivalent is received Doctrine of constructive receipt applies s6-5(4)
2) Accruals
income is derived when it has been earned, usually when a debt comes into existence eg, once services
have been performed or goods have been delivered, and an invoice has been rendered by taxpayer to
customer (doesn’t matter if customer has not yet paid)
What is the appropriate basis: cash vs. accruals?
 ‘Determine the method that is calculated to give a substantially correct reflex of the taxpayer’s
true income’ (Dixon J in Carden’s case)
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

Use the method that most accurately represents the “truth and reality of the situation’ (Fullagar
J in Ballarat Brewing)
Look at the case law and TR 98/1
Relevant factors:
 Size of the business
 How much of the taxpayer’s profit is attributable to its employees?
 Is dealing in trading stock an important part of the business?
 Cash or credit sales?
 How much of the taxpayer’s profit is attributable to exploitation of capital assets?
 Reliance on circulating capital or consumables
Key Cases:
 Employee – generally (cash)
Carden’s case – medical practitioner in sole practice (cash)
 Henderson – large accountancy partnership (19 partners, employed 295 staff including 150
accountants) (accruals)
 Firstenberg – solicitor in sole practice who employed a secretary (cash)
 Dunn – chartered accountant in sole practice, 3 employees none of whom were qualified
accountants. Dunn took responsibility for all work, work billed when it was completed (cash)
 Barratt – large pathology practice, employed many staff and operated through associated
service companies that owned diagnostic equipment and employed technicians (accruals)
When is income ‘derived’? – Accrual Basis Taxpayers
 Henderson (1970) 119 CLR 612 – large accountancy practice, professional WIP, fees must mature
into recoverable debt
 AGL 83 ATC 4800 – regulated gas company had supplied gas that was as yet unbilled, must
satisfy conditions precedent, claims against customers had not matured into recoverable debt
 BHP Billiton Petroleum Ltd 2002 ATC 5169 – genuine dispute, no derivation until dispute settled
 J Rowe & Sons Pty Ltd (1971) 124 CLR 421 – taxpayer sold household goods on credit terms
(instalment basis) for periods of upto 5 years, full amount derived at time of sale
When is a loss/outgoing ‘incurred’?
 See also TR 97/7
 When the taxpayer “has completely subjected himself to” the loss/outgoing
 (James Flood)
 “To come within that provision there must be a loss or outgoing actually incurred. ‘Incurred’
does not mean only defrayed, discharged or borne, but rather it includes encountered, run into,
or fallen upon...But it does not include a loss or expenditure which is no more than impending,
threatened, or expected.” (Dixon J in New Zealand Flax)
 Loss/outgoing must ‘come home’ to the taxpayer and presently existing liability (Barwick CJ in
Nilsen)
Advance Receipts
Arthur Murray (1965) 114 CLR 314
Taxpayer carried on a business of providing dance lessons
Advance receipts re course of dance lessons (practice of refunds) Credited to suspense account and
transferred as lessons were provided
Traditional approach – deduct when incurred
Coles Myer Finance
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- Presently existing liability to pay at a future date
- ‘Incurred’
- Deduct to extent ‘properly referable to the year of income’
Statutory Regime
- Advance payments ss82KZL - KZO
Net profit/loss accounting
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


May be appropriate in certain cases eg,
Isolated business venture (Whitford’s Beach)
Isolated transactions within an existing business (Myer Emporium)
Banking/insurance/investment companies where realisation is an ordinary incident of business
of investing for profit (London Australia Investment)
Trading stock
Div 70 ITAA97
 70-10 inclusive definition
 70-15 Expenditure incurred in purchasing trading stock is only deductible in the year
 that it becomes ‘trading stock on hand’
 70-25 Expenditure incurred in purchasing trading stock is not capital expenditure
 70-35 tax accounting rules re trading stock adjustment
 70-40 value of trading stock at start of income year
 70-45 value of trading stock at end of income year
Note: cannot depreciate trading stock (s40-30(1)(b))
Tax accounting for trading stock
1. Purchase of trading stock (deduction 8-1)
2. Sale of trading stock (assessable income s6-5)
3. Trading stock adjustment (s70-35)
Trading stock adjustment s70-35
Based on comparison of Opening Stock Value and Closing Stock Value
 If CSV > OSV = assessable income (s70-35(2))
 If OSV> CSV = allowable deduction (s70-35(3))
Opening Stock Value, OSV = (same as CSV from previous year)
Closing Stock Value, CSV = choice: cost, market selling value, replacement value
When is trading stock ‘on hand’?
 Farnsworth (1949) 78 CLR 504
 Taxpayer must have power to dispose of it
 Clearly ‘on hand’ if trading stock is in store, warehouse
 But what if it is in transit? eg, on a ship, truck etc
 All States Frozen Foods 89 ATC 5135 – does not necessarily require physical possession
Tutorial Questions
1. Why is it important to determine when income is ‘derived’ and when a loss/outgoing is
‘incurred’?
a. To determine which year of income the income is recognised in (timing issue)
2. Explain the difference between the ‘cash’ and ‘accruals’ basis
a. Cash is derived when it is actually received, accrual basis income is when it has been
earned (usually when a debt comes into existence) – right to receive the money
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3. How do you determine which method (cash or accruals) is appropriate for a particular taxpayer?
Make sure you refer to any relevant cases.
a. ‘Determine the method that is calculated to give a substantially correct reflex of the
taxpayer’s true income’ (Dixon J in Carden’s case)
b. Use the method that most accurately represents the “truth and reality of the situation’
(Fullagar J in Ballarat Brewing)
c. Tax legislation does not intend for there to be a choice, whichever gives most accurate
reflection
d. TR 98/1
i. Size of the business (small uses cash, large uses accrual)
ii. How much of the taxpayer’s profit is attributable to its employees?
iii. Is dealing in trading stock an important part of the business?
iv. Cash or credit sales?
v. How much of the taxpayer’s profit is attributable to exploitation of capital
assets?
vi. Reliance on circulating capital or consumables:
e. If you only have 1 professional staff vs 10 administrative staff
f. Carden’s case – medical practitioner in sole practice (cash)
g. Henderson – large accountancy partnership (19 partners, employed 295 staff including
150 accountants) (accruals)
h. Firstenberg – solicitor in sole practice who employed a secretary (cash)
i. Dunn – chartered accountant in sole practice, 3 employees none of whom were
qualified accountants. Dunn took responsibility for all work, work billed when it was
completed (cash)
j. Barratt – large pathology practice, employed many staff and operated through
associated service companies that owned diagnostic equipment and employed
technicians (accruals)
4. When is a loss/outgoing incurred? Explain your answer by reference to any relevant key cases
a. Once he has liability – cannot escape liability
b. When the taxpayer “has completely subjected himself to” the loss/outgoing
c. Way we determine this is by looking at whether there is a presently existing liability. If
there is most likely L/O occurred
5. How do you determine whether trading stock is ‘on hand’? Why is this important?
a. Depends on whether Taxpayer has power to dispose of trading stock (Farnsworth
(1949) 78 CLR 504)
b. Does it have the power to sell the stock. Trading stock = ready to sell/right to dispose =
can claim a deduction on it, it is not a capital purchase?
c. If you purchase something from USA, supposed to deliver to Sydney
Question 1
Sam is the sole shareholder, director and employee of a company, Sam’s Lawn Mowing Pty Ltd. Sam’s
company owns and operates a Huskyarna heavy-duty, ride-on mower for mowing lawns on large
properties and golf courses. The mower is the company’s major asset. The business charges customers an
hourly rate for the use of the heavy-duty, ride-on mower and for Sam’s time/effort in operating the
mower. Sam is in control of the mower at all times. Sam charges $500 per hour of which approximately
$100 is for his labour. The company maintains simple books of account and records income when it is
received. Most customers pay cash upon completion of a job. Sam rarely gives credit, only in special
circumstances.
Advise Sam as to whether the cash or accruals basis is more appropriate in this case.
Go through relevant factors:
 Size of the business
o Small (Carden; Dunn) – Cash
o Only has one capital equipment, he relies on this – based on this alone, would be accrual
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

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 $100 for his labour (20%) and $400 from equipment (80%)
o Overall, would be cash based to record income
How much of the taxpayer’s profit is attributable to its employees?
o Sam is sole director
Is dealing in trading stock an important part of the business?
o Not important – more likely cash basis
Cash or credit sales?
o Mostly cash, does not give a lot of credit, mostly Cash
How much of the taxpayer’s profit is attributable to exploitation of capital assets?
Reliance on circulating capital or consumables
Just because currently using cash does not necessarily mean it’s the most appropriate method.
Question 2
‘Abbott, Russell & Paige’ is an accounting partnership with 8 partners, 15 employed professional
accountants and 20 support/secretarial staff. The partnership has offices in North Sydney, Macquarie
Park and Parramatta. During the 2016/17 year of income, fees of $150,000 were earned by the
partnership, and invoices were sent to clients, but payment has not yet been received as at 30 June 2017.
There is also some professional work-in- progress (WIP) as at 30 June 2017.
Upto and including the year ended 30 June 2016 the partnership had submitted its income tax returns on
a cash basis and the Taxation Commissioner assessed them on this basis. However, due to the
increasingly complex nature of their activities, the partnership has decided to submit its return for the
year ended 30 June 2017 on an accruals basis.
a) Advise ‘Abbott, Russell & Paige’ as to whether the change to the accruals basis is appropriate?
a. In order to assess whether the change to the accruals basis is appropriate, is must be
determined which method would give a substantially correct reflex of the taxpayer’s true
income’ (Dixon J in Carden’s case). There are relevant factors in TR 98/1 including the
size, how much profit is attributable to employees, whether there are cash or credit
sales.
b. On the facts, the business is large scale, with 8 partners, 15 employed professional
accountants and 20 support/secretarial staff. The partnership has offices in North
Sydney, Macquarie Park and Parramatta. This bares similarity to the cases of Henderson
and Barrat, which suggests accrual basis is more appropriate.
c. Furthermore, the facts suggest a large profit of the taxpayer’s profit is attributable to its
employees, as there are various employees professional accountants as well as multiple
support/secretarial staff. This suggests accrual basis is more appropriate.
d. Additionally, During the 2016/17 year of income, fees of $150,000 were earned by the
partnership, and invoices were sent to clients, but payment has not yet been received as
at 30 June 2017, suggesting there is a large majority of credit sales. This suggest accrual
basis is more appropriate.
e. Given the above factors, the change to the accruals basis is appropriate.
b) For tax purposes, in which income year are fees of $150,000 regarded as having been derived?
a. 2016/17
b. Under accruals basis, when income has been earned. During the 2016/17 year of
income, fees of $150,000 were earned by the partnership, and invoices were sent to
clients, but payment has not yet been received as at 30 June 2017.
c) What treatment should be adopted in respect of the value of work-in-progress (WIP) as at 30
June 2017?
a. Henderson case had similar facts, basically ignored the WIP so income was recognised
even though there was WIP. Account must only be made of fees actually earned. To be
earned, job must be completed and in most cases, invoice should have been rendered as
well.
b. WIP is not treated as income.
c. WIP (halfway through, service has not been delivered yet) – so not income and not
deduction as well. Cannot bill anyone if WIP
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Question 3
Sally is a chartered accountant operating her own practice as a sole practitioner. She employs a
receptionist. She takes sole responsibility for the practice, and signs off on all of the relevant
documents/advice. She submits income tax returns on a cash basis. During the 2016/17 income year, she
receives $110,000 in fees (80% related to services provided during the current year, and 20% related to
services provided in the previous year). In June 2017 she receives invoices for a number of office
expenses (including telephone and stationery expenses) which she pays in August 2017.
Relevant factors:
 Size of the business
o Small (Carden; Dunn) - Cash
 How much of the taxpayer’s profit is attributable to its employees?
o Sally is sole practitioner, doing it by herself
 Is dealing in trading stock an important part of the business?
o Not important – more likely cash basis
 Cash or credit sales?
o Mostly cash
Cash most appropriate
a) In which income year are the expenses paid, deductible?
a. TR 97/7: When the taxpayer “has completely subjected himself to” the loss/outgoing
(James Flood)
b. Loss/outgoing must ‘come home’ to the taxpayer and presently existing liability (Barwick
CJ in Nilsen)
c. Taxpayer does not need to have paid money provided taxpayer is definitively obligated
himself to the liability.
d. 2016/17, because Sally has completely subjected herself to the loss/outgoing presently
existing liability (James Flood)
e. Even tax most appropriate, a deduction may still be available as long as it has been
incurred. Still can get a deduction that you have not yet paid but still have incurred.
f. Sally gets invoice in 2016/17, so she can get a deduction for those expenses in 2016/17.
g. May be entitled to a deduction as long as it has been incurred.
b) How much income has Sally derived during the 2016/17 income year, based on the above
facts?
a. Cash basis is most appropriate, on cash basis income is derived when cash is received
$110,000. She can claim deductions by the end of June 2017 as someone has issued her
the invoice.
c) Consider the following additional facts:
Sally owes her plumber $7,000 for repairs to her bathroom. Sally requests one of her clients, who owes
her $5,000 for accounting services, to pay this amount directly to her plumber.
Has Sally derived any income?
a) Yes, because of the doctrine of constructive receipt.
b) As soon as the money has been dealt with in accordance with taxpayer’s instructions, the
taxpayer is taken to have received it. S 6-5(4).
c) In her books, it will show $7000 exp and $5000 income
Question 4
As at 1 July 2016, ABC Traders Ltd had opening stock of $130,000. During the year it made the following
purchases:
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a) What deductions are available to ABC Traders Ltd in respect of trading stock?
a. Trading stock – something sold in ordinary course of business (1997 ITAA)
b. Division 70
c. Deductible under 8-1 = all deductions are deductible
d. If OSV> CSV = allowable deduction (s70-35(3))
e. Deduction is available where closing stock value is less than opening stock value (slide
19)
f. Further deductions depends on adjustment (2)
b) In order to minimise taxable income for the year, what is the value of the trading stock at the
end of the year?
a. Need to maximise deductions – purchases are deductions (and comes from
adjustments)
b. How much is the closing stock value? Opening stock value is given $130,000 but we need
to maximise deductions as much as possible between OSV and CSV
c. Closing stock this year will be opening stock next year – cannot change opening balance
d. Pick lowest from table valuation because assuming wants to minimise taxable income
therefore minimise closing stock – choose different prices for each stock but use the
lowest
A- cost price of $2 because it’s the lowest. 2x5000 (price x quantity) = 10,000
B- market selling, $12,000 – 4000x3
C- cost price – $36,000 – 6 x 6000
D $24,000 – 6x4000
= 82,000
Opening stock 130,000-82,000=48,000
As CSV is less than the OSV, ABC Traders would be able to claim a deduction equal to $130,000-82,000 =
48,000
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Business entities, sole traders + partners
Small Business Entities (SBE)
s328-110
An entity is a “small business entity” if it:
 Carries on a business during the year; and
 Satisfies the aggregated annual turnover test
Aggregated Turnover Test
Generally, the Aggregated turnover test is satisfied if an entity’s:
1. Aggregated turnover for the previous year was less than the specified threshold
a. If this is satisfied, do not need to consider second or third test
2. Aggregated turnover for the current year is likely to be less than the specified threshold, or
a. Made as at first day of income year, or first day entity started to carry on business if
later
b. ‘Likely’ = on the balance of probabilities
c. Factors that may be considered:
i. Entity’s aggregated turnover in previous income years
ii. Whether entity is likely to have reduced staff this year
iii. Whether operating hours of business will decrease
3. Aggregated turnover for the current year (worked out at the end of the year) is actually less than
the specified threshold.
a. If an entity started to carry on business sometime in the year, it needs to calculate what
its turnover would have been if its entity carried on business for full year
Aggregated Turnover
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

s328-115 'Aggregated turnover' is based on the combined 'annual turnover' of the entity, its
'connected entities' and its 'affiliates' for the particular income year
An entity is 'connected' with another entity if it controls the other entity or is controlled by the
other entity, or they are under common control
o Basic test: 40% ownership (control %) – an entity controls another entity where the first
entity or its affiliates beneficially own, or have the right to acquire interests in the other
entity that between them give the right to receive at least 40% of any distribution of any
income or capital
An 'affiliate' of an entity is an individual or company that acts, or could reasonably be expected
to act, in accordance with the entity’s directions or wishes, or in concert with the entity.
o Family/close relationships/financial relationships/dependencies
o Relationships through common directors, partners or shareholders
o The degree to which entities consult with each other on business matters
o Whether one of the entities is under a formal or informal obligation to purchase goods
or services or conduct aspects of their business with the other entity
Tax concessions for SBE’s
Examples:
 Small business tax offset for individuals
 Special pooling arrangements and immediate deductions for depreciating assets
 Immediate deductions for certain capital expenses associated with starting a new business
 Simplified trading stock rules
 Small business CGT concessions
 Reduced tax rate for small companies 27.5% for 2017/18
 Small business restructure roll-over relief
 Concessional GST treatment
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Partnerships
Tax Definition of Partnership
s995-1 ITAA97 Tax law definition of ‘partnership’ includes:
 General law partnership = 2 or more persons carrying on a business in common with a view to
profit (see Partnership Acts)
 Tax law partnership = 2 or more persons in receipt of ordinary income or statutory income jointly
(FCT v Mc Donald 87 ATC 4541) or
 A limited partnership NOTE: a partnership is NOT a separate legal entity
Overview – “Flow-Through” Model
1. Identify partnership
a. General law partnership
b. Tax law partnership
2. Calculate
a. Net income of partnership or partnership loss
3. Allocate to partners
a. General law partnership (Partnership Agreement)
b. Tax law partnership (Property Ownership)
c. When?
Tax treatment of ‘partnership’ income
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See Div 5 of Pt III, ITAA36
A tax accounting entity but NOT a tax paying entity
S91 ITAA36: “A partnership shall furnish a return of the income of the partnership, but shall not
be able to pay tax thereon.”
Partnership level:
o Calculate ‘net income of partnership’ or ‘partnership loss’’
o Treat the partnership as if it were a resident taxpayer
o Under s90: Net income = assessable income – deductions (excludes personal super
contributions + loss carried forwards)
Example: Tom (a resident) and Jane (a foreign resident) carry on business as partners selling solar panels.
During the relevant income year, they derive assessable income of $100,000 from selling solar panels in
Australia and $50,000 from selling solar panels overseas. They also have $30,000 of allowable deductions
relating to the running of the business.
For the purpose of calculating net income of the partnership, the partnership is treated as if it were a
resident taxpayer. Therefore, income from all sources is taken into account.
Net income of partnership = $100,000 + $50,000 - $30,000 = $120,000
Partner level:
 Individual interest in net income is included is included in partner’s assessable income; or
 Individual interest in partnership loss is deductible to partner
 ‘Flow-through’ model, s92:
o Assessable income of the partner includes the individual interest of the partner in the
net income of the partnership
o Deduction is allowed to the partner representing the individual’s interest in the
partnership loss
o Consistent with jurisdictional rules
Example: Tom (a resident) and Jane (a foreign resident) are equal partners in a partnership. If the
partnership derived net income under s90 of $100,000 during the year and the net income was 80%
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attributable to Australian sources and 20% attributable to foreign sources, Tom and Jane must include
the following amounts in their assessable income under s92:
Tom $100,000 x 50% = $50,000
Jane $80,000 x 50% = $40,000
If the partnership had made a partnership loss under s90 of $100,000 during the year and the loss was
70% attributable to Australian sources and 30% attributable to foreign sources, Tom and Jane would be
entitled to the following deductions under s92.
Tom $100,000 x 50% = $50,000
Jane $70,000 x 50% = $35,000
Individual Interest of Partner
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
General law partnership: allocation of profits or losses depends on the Partnership Agreement
Tax law partnership: sharing of profits or losses cannot be varied by agreement, allocation of
profits or losses is based on the partners ownership interests in the underlying property
FCT v McDonald 87 ATAC 4541
Facts: Husband and wife jointly owned rental/investment property. Partnership agreements. Wife had
75% allocation of profits, Husband 25% allocation of profits and 100% allocation of losses (high income
earner).
Held: Court found this was not a general law partnership (not carrying on a business). Profits and losses
split by ownership interest (i.e. 50/50) as it was a tax law partnership, not a general law partnership
When do partners derive income?
Rose v FCT
 Partner’s share of income is income because of its income qualities to the partnership, not
because a distribution
 Derive regardless of actual distribution
 Derive when share of income ascertained
 The fact that a partner does not withdraw with full profit entitlement is of no consequence for
income tax purposes (Case 7 2000 2000 ATC 168)
 The design of s92 is to catch is to catch the whole of a partner’s interest in any year of income
rather than merely the amount of his drawings
Partner’s salaries
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
A partner’s salary is not regarded as an expense as a partnership is not a separate legal entity,
therefore not deductible
Treated as an allocation of profits (Re Scott v FCT (2002))
TR 2005/7: an agreement to pay salary to a partner ‘takes effect as a contractual agreement
among the partners to vary the distribution of partnership profits among the partners so that
one partner receives an additional share of the profits’
Interest payments between partnership/partners




Interest paid to a partner on capital contributed to the partnership is not regarded as an expense
and not deductible
Interest incurred by a partnership on a loan used for working capital is deductible
Applies even if the loan is used to repay capital contributions of partners, provided the
borrowings are used to refinance funds employed in the partnership business
See FCT v Roberts and Smith (1992) and TR 95/25
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Interactions with Capital Gains Tax (CGT)
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Capital gains and capital losses arising from a CGT event in respect of partnership or one of its
CGT assets are made by partners individually, s 106-5 ITAA97
CGT consequences on new partner admissions and retirements
Admissions: existing partners treated as disposing their interest in partnership assets
Retirement: remaining partners treated as requiring a share of the departing partner’s interest in
partnership assets
Compare to other business structures
Examples:
 Sole trader: a person who owns and controls their own business
Advantages
Disadvantages
 SBE tax concessions
 Unlimited liability
 Owner controls business
 Requirements significant personal involvement
 Owner keeps all profits
 Limited to owner’s skill/expertise
 Lack of formalities
 Business ends upon death/retirement of sole
trader
 Low establishment/running costs
 Limited fundraising options
 Trust
 Company
Tutorial Questions – Partnerships
1. Compare the tax law definition of ‘partnership’ in s995-1 ITAA97 to the general law definition.
Are the definition similar or different?
a. S995-1 (tax law): 2 or more persons in receipt of ordinary income or statutory income
jointly (FCT v McDonald 87 ATC 4541) or a limited partnership
i. Wider definition
ii. Split profits based on how much % they earn
b. General law partnership: 2 or more persons carrying on a business in common with a
view to profit (see Partnership Acts)
i. Have to carry on a business
ii. Split profits based on their own Partnership Agreement
2. Is a partnership a tax paying entity?
a. It is a tax accounting entity but not a tax paying entity – Div 5 of Pt III, ITAA36
b. S 91 ITAA36: ‘A partnership shall furnish a return of the income of the partnership, but
shall not be liable to pay tax thereon’
3. Explain the tax treatment of partnership income
a. On a partnership level: calculate ‘net income of partnership’ or ‘partnership loss’ – treat
the partnership as if it were a resident taxpayer
b. On a partner level: individual interest in net income is included in partner’s assessable
income OR individual interest in partnership loss is deductible to partner – ‘flow through
model’ – split them into the partners
4. How is the net income of the partnership or partnership loss allocated to partners?
a. On a partnership level: excess of deductions (exclude personal super contributions and
loss carried forwards) over assessable income – as per the agreement
b. On a partner level: individual interest in partnership loss is deductible to partner
5. How does the income tax treatment differ for resident partners vs foreign resident partners?
a. Consistent with jurisdictional rules
b. Resident partners: assess every single dollar that they earn whether in Australia or not
c. Foreign resident partners: only the amount that they earned from Australian sources
Question 1
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Tom and his wife Jane are Australian residents for tax purposes. Jane is very talented at sewing curtains.
Her friends are very impressed with the curtains that she has sewn for her home, and several of Jane’s
friends ask her if she would consider sewing custom-made curtains for them. Jane is very keen on the
idea of designing and sewing custom curtains and selling them to customers. She is confident of her
ability to design and sew the curtains, but has had no experience in marketing and business
management. However, her husband Tom has previously worked as a marketing manager in an
accounting firm. Jane discusses her idea with Tom over dinner, and he agrees to be a part of the
proposed enterprise and arrange the marketing of the curtains. Tom and Jane agree to allocate 80% of
any profits from the curtain sales to Jane and 20% to Tom. On 1 July 2017, Tom and Jane start carrying on
the business of making/selling custom curtains. Tom takes photographs of Jane’s various curtain designs,
and puts together a glossy catalogue, which he distributes to potential customers. Jane is flooded with
orders for custom-made curtains and she is often kept at her sewing machine late at night to keep up
with the orders. Tom visits potential customers in their homes to give quotes and take measurements for
custom-made curtains. For the 2017/18 year of income, gross receipts from the sale of curtains were
$180,000. Expenses incurred in relation to the business were $40,000.
In January 2018, Tom’s elderly mother becomes ill. Tom and Jane move into Tom’s mother’s house to
care for her. From 1 February 2018, they rent out their existing home to a tenant at a rental of $700 per
week. The title to their property has always been in their joint names (they are equal owners). For the
2017/18 year of income, expenses in relation to the property were council rates of $2,500, water rates of
$500, and insurance premiums of $1,000.
During the 2017/18 income year, Tom and Jane had no income from sources other than those arising in
the above facts.
a) Advise Tom and Jane regarding the income tax implications to each of them, arising from the
above facts, in relation to the 2017/18 year of income. In your answer include the calculation of
Tom and Jane’s taxable income for the 2017/18 year of income.
First, look at how many partnerships they are.
Then, see what kind of partnerships they are.
For sewing: this is a general tax partnership because they are carrying on a business together, so
everything is split according to their agreement
For rental: this is a tax law partnership, since they are in receipt of ordinary income jointly
1. Work out net profit
2. Split into each partner based on agreement
3. Partnership distribution 1 + partnership distribution 2 = assessable income
a. If taxable income = take out deductions
So, work out partnership distribution then add them together.
Sewing business: (specified as 80% profits to Jane, 20% to Tom)
Net income of partnership: $180,000 - $40,000 = $140,000
Tom: $140,000 x 20% = $28,000
Jane: $140,000 x 80% = $112,000
Rental (equal owners, 50% each)
Net income of partnership: $14,000 - $1666.67 = $12,333.33
Tom: $12,333 x 50% = $6166.67
Jane: $12,333 x 50% = $6166.67
($14,000 for rent: $700 per week x 5 months (Feb until July) x 4 weeks)
($1666.67 for rent expense: $4,000 are for whole year so/12, x 5 months)
Therefore, taxable income:
Tom: $28,000 + $6166.67 = $34,166.67
Jane: $112,000 + $6166.67 = $118,116.67
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b) How would your answer be different if gross proceeds from the sale of curtains were only
$20,000 in the 2017/18 income year?
Sewing business: (specified as 80% profits to Jane, 20% to Tom) – if not specified, assume 50%
Net income of partnership: $20,000 - $40,000 = $20,000 loss
Tom: $20,000 x 50% = $10,000 loss
Jane: $20,000 x 50% = $10,000 loss
Rental (equal owners, 50% each)
Net income of partnership: $14,000 - $1666.67 = $12,333.33
Tom: $12,333 x 50% = $6166.67
Jane: $12,333 x 50% = $6166.67
($14,000 for rent: $700 per week x 5 months (Feb until July) x 4 weeks)
($1666.67 for rent expense: $4,000 are for whole year so/12, x 5 months)
Therefore, taxable income:
Tom: -$10,000 loss + $6166.67 = - $3833.33 loss
Jane: -$10,000 loss + $6166.67 = - $3833.33 loss
Question 2
Jack is employed full time as an actuary. During the 2016/17 income year, he receives a salary of
$170,000 from his employer. Jack and his wife Jill (a housewife) have a very large family. Jack and Jill are
Australian residents for tax purposes. In order to add to their income, Jack and Jill buy a rental property
jointly. They are equal owners of the property. In order to fund the purchase of the property, they take
out a bank loan in their joint names. Jack and Jill also enter into an agreement entitled “Partnership
Agreement” which provides that Jack is entitled to 10% of any profits from the property, and Jill is
entitled to 90% of profits from the property. The agreement also provides that Jack is entitled to 100% of
any loss from the property. The property is rented out to tenants from 1 July 2016 (so expenses do not
need to be proportioned)
During the 2016/17 year of income, rent from the property was $50,000, and the following outlays were
incurred:
Deductible
Deductible
Deductible
Deductible
Deductible
Deductible
Deductible
Not deductible – not a repair
During the 2016/17 income year, Jack and Jill had no income from sources other than those arising in the
above facts.
a) Advise Jack and Jill regarding the income tax implications to each of them, arising from the above
facts, in relation to the 2016/17 year of income. In your answer include the calculation of Jack
and Jill’s taxable income for the 2016/17 year of income.
Looking at fundamental issue: it is a tax law partnership (because there is no business here, only a rental
property where people own income together). So sharing of profits or losses cannot be varied by
85
agreement, only % of ownership on underlying property – in this case, it is equal ownership so this is how
it will be split on profits AND losses
a. Rent from property $50,000 – expenses $19,800 = $30,200
i. Jack and Jill will each receive $15,100 (based on 50%)
b) How would your answer be different if, due to a decline in the rental market, Jack and Jill are
unable to rent the property out to tenants until 1 October 2016, and rent received during the
2016/17 income year is only $9,000.
a. As long as property is available, the expenses are deductible
b. If income is only $9,000 – expenses $19,800, = $10,800 loss
c. So, based on 50% = each person gets $5,400 loss (can be offset against other earned
income – in this case, only Jack has extra income)
Question 3
Tom is a very experienced professional accountant who has spent the last ten years working at a top-tier
accounting firm. His son, Jerry has recently qualified as a chartered accountant and Tom is keen to take
Jerry under his wing. Tom has the idea of leaving his current job at the accounting firm and starting a new
accountancy practice together with his son Jerry. Tom discusses the idea with Jerry over a milkshake one
weekend. Jerry is very keen to play his part in the proposed enterprise and readily agrees to carry on a
business together with his father. Tom and Jerry agree that Tom will be entitled to 70% and Jerry will be
entitled to 30% of any profits from the accountancy practice, and Tom will be allocated 100% of any
losses. Tom and Jerry are both Australian residents for tax purposes. In recognition of Tom’s
skill/experience, Tom and Jerry have agreed that Tom will be paid a salary of $40,000 out of the proceeds
of the business.
During the 2016/17 year of income, fees of $250,000 were received, and the following outlays were
incurred in relation to the business:
During the 2016/17 income year, Tom and Jerry had no income from sources other than those arising in
the above facts.
a) Advise Tom and Jerry regarding the income tax implications to each of them, arising from the
above facts, in relation to the 2016/17 year of income. In your answer include the calculation of
Tom and Jerry’s taxable income for the 2016/17 year of income.
a. This is a general law partnership because they are carrying on a business together.
b. Partner’s salary is NOT deductible in a partnership – in order to calculate net profit, the
salary is not included. You can consider the salary as a priority distribution before the
split – so in partnership agreement, if they are making a profit, whoever is doing the
‘hard work’ is able to take the salary first
c. Business income $250,000 – expenses $57,000 = $193,000 (total net profit) – 40,000
(salary is taken out first and is not deductible) = $153,000
d. Distribution needs to be equal to net profit
i. Tom: $153,000 x 70% = $107,100 + 40,000 salary = $147,100
ii. Jerry: $153,000 x 30% = $45,900
b) How would your answer be different if fees of only $50,000 were received during the 2016/17
income year?
a. Loss of: $7,000 – salary cannot make the partnership loss – if partnership has loss, is not
allowed to distribute salary to anyone
b. Tom incurs all losses: $7,000 to him
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Question 4
Kate and Peter carry on a local supermarket business together. Kate and Peter are both Australian
residents for tax purposes. Kate and Peter have entered into a Partnership Agreement which provides
that Kate will be entitled to 60% and Peter will be entitled to 40% of any profits from the business. The
agreement also provides that Peter will be allocated 90%, and Kate 10%, of any losses.
During the 2016/17 income year, gross receipts from the business were $180,000. A number of expenses
were incurred in deriving business income. During the 2016/17 income year, Kate and Peter had no
income from sources other than those arising in the above facts. Advise Kate and Peter regarding the
income tax implications to each of them, arising from the above facts, in relation to the 2016/17 year of
income. In your answer include the calculation of Kate and Peter’s taxable income for the 2016/17 year
of income.
Deductible – either have further deduction or further assessable income (based on prev
week lecture)
Deductible
Not deductible
Deductible
Deductible
Deductible – private use so 60% business usage (so 1200 deductible for business)
Deductible
If opening value > closing = $1,000 deductible







This is a general law partnership because they are carrying on a business
If CSV > OSV = assessable income (s70-35(2))
If OSV > CSV = allowable deduction (s70-35(3))
So in this case, opening is larger than closing
o Therefore, this is an allowable deduction
So, to work out net income:
o Gross receipts = $180,000
o Deductions: look at table above to see what is deductible or not
Net income = $116,800
Based on agreement:
o Give Kate the $20,000 salary and then distribute the rest
So, $116,800 – 20,000 = $96,800
 Kate 60% x $96,800 = $58,080 + $20,000 = $78,080
 Peter 40% x $96,800 = $38,720
ADDITIONAL NOTES:
** salary, superannuation, interest on capital to partnership (at partnership level) – not deductible
** but interest on loan – deductible (can come out from bank or partner)
If from bank or partner = considered as income
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If partnership needs money to do business – get loan from bank and interest on the loan is deductible,
even if it is from one of the partners = because it is FOR the business
If interest is on the loan, at partnership level, it is income to the partner
Extra class question: John and Amy are in partnership in equal shares and carry on a business of selling
comic books. They agree that John will receive a wage of $50,000 because he works in the shop. Amy
received interests of $20,000 on her partnership capital account. John has wages from his lecturing job of
$70,000 and Amy has unfranked dividends of $60,000. Both have individual gift deductions in the amount
of $4,500 for John and $3,500 for Amy. They do not employ any staff.
The accounts for the 2018 tax year showed the following:
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Trusts
What is a trust?


A relationship: trustee holds legal title of trust property for the benefit of beneficiaries
A trust I NOT a separate legal entity
Trustee

It may be created by:
o Inter-vivos settlement
o Operation of law
o Testamentary disposition
Who is a trustee?
Trustee must be a person with legal capacity – eg. may be an individual or company, cannot be sole
beneficiary, however sole beneficiary can be sole shareholder in corporate trustee
 S 6(1) definition
 Includes general law trustees
 Also includes administrators, executors, receivers, etc
 Anyone acting in fiduciary capacity
Fixed v Discretionary Trusts
Fixed Trusts – beneficiaries’ entitlements are fixed/predetermined by terms of the trust instrument (eg.
unit trust)
Discretionary Trusts – trustee has absolute discretion/power to distribute to beneficiaries (no
entitlement until trustee has exercised its discretion)
A testamentary trust is a trust created under a will and can either be a fixed trust or discretionary trust
Overview: tax treatment ‘flow-through’ model
1. Identify trust
a. Unit trust
b. Discretionary trust
2. Determine ‘trust law’ income and beneficiary entitlements as a %
a. Note: ‘trust law’ income is the distributable income ascertained by trustee according to
appropriate accounting principles and the trust instrument (different from ‘net income’
of the trust estate)
3. Calculate
a. ‘Net income’ of trust estate = assessable income – deductions (s95)
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4. Allocate
a. Unit trust (% units held)
b. Discretionary trust (% beneficiary entitlements)
c. Proportionate Approach (Bamford case)
d. Beneficiary must be ‘presently entitled’
e. Who is assessed and at what rate? (see also ss 97, 98, 99, 99A and 100)
i. Beneficiary under a legal disability (eg. minor (under 18)/bankrupt/insane) –
trustee will be required to pay income tax on behalf of the beneficiary at the
rate of tax that the beneficiary would have paid, s 98
ii. Resident with no legal disability – s97 beneficiary assessed at marginal rates
iii. Foreign resident – trustee assessed at foreign resident rates (exclude foreign
source income)
iv. Minor – trustee assessed – minor rates (i.e. highest possible rate) unless
testamentary trust
v. Insane – trustee assessed at marginal rates
vi. Unallocated income – trustee assessed – s99A highest rate unless testamentary
trust
How to calculate net income of the trust estate
Div 6, Pt III, ITAA36
 Trustee lodges return
 ‘Net income of the trust estate’ calculated in the return
 S 95: ‘net income’ in relation to a trust estate, means the total assessable income of the trust
estate calculated under this Act as if the trustee were a taxpayer in respect of that income and
were a resident, less all allowable deductions
S 97, Div 6, Pt III, ITAA36
 ‘…where a beneficiary of a trust estate who is not under any legal disability is presently entitled
to a share of the income of the trust estate … the assessable income of the beneficiary shall
include … that share of the net income of the trust estate …’
Beneficiary – ‘presently entitled’
Beneficiary is taxed on what they are ‘presently entitled’ to
 Eg. it was paid to the beneficiary, or beneficiary had the right to demand immediate payment of
it
 Note: regarding discretionary trust, beneficiary may only be entitled once the trustee has
exercised its discretion
 Harmer v FCT 91 ATC 5000
 FCT v Whiting (1943) 68 CLR 199
‘Share’ of net income – FCT v Bamford
‘share’ means proportion
 Proportionate approach: a beneficiary’s share of the net income of the trust estate is calculated
by reference to the proportion of the income of the trust estate to which the beneficiary is
presently entitled
 Earlier cases:
o Zeta Force Pty Ltd v FCT 98 ATC 4681
o Davis v FCT 98 ATC 4377
o FCT v Prestige Motors Pty ltd 98 ATC 4241
Example: Proportionate Approach
90
Further Examples
 If a resident beneficiary is presently entitled to 40% of the trust law income of a trust estate, the
beneficiary would also be assessed on 40% of the net income of the trust estate
 If the trust law income of the trust estate is $100, and the net income of the trust estate is $200,
the beneficiary’s share of the net income of the trust estate is 40% x $200 = $80
 If the trust law income of the trust estate is $200, and the net income of the trust estate is $100,
the beneficiary’s share of the net income of the trust estate is 40% x $100 = $40
 If there was $0 trust law income of the trust estate, but there was $100 net income of the trust
estate, the beneficiary’s share of the net income of the trust estate is nil, as there is no share of
the trust law income to which the beneficiary is presently entitled
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Companies and Shareholders
Tax Law definition of ‘Company’
S995-1 ITAA 97 ‘company’
 ‘means a body corporate,
 Or any other unincorporated association or body of persons …’
 Expressly excludes a partnership
Broader than general law definition:
 Note: tax treatment of companies is extended to ‘corporate tax entities’. Eg. corporate limited
partnerships, corporate unit trusts, public trading trusts (s960-115, ITAA97)
Taxation of Companies





S4-1 income tax is ‘payable by each individual and company’
S4-15 Taxable income = assessable income – deductions
Corporate taxpayer – importance of corporate tax in Australia
A separate legal entity
Note: similar to other taxpayers but some special rules
o A company’s income year is the previous financial year
o Flat rate of tax on taxable income
o Special rules re tax losses
Corporate Tax Rates
From the 2017-18 income year, companies that are base rate entities must apply the lower 27.5%
company tax rate.
 S 23AA, Income Tax Rates Act
 A base rate entity is a company that:
o Has an aggregated turnover less than the turnover threshold; and
o Is carrying on a business
 Otherwise, company tax rate is 30%
Payment of tax by companies







Lodge return – deemed assessment s166A, ITAA36
Payment of tax under PAYG system
Usually quarterly instalments re income for that quarter
Instalments based on company’s ordinary income for quarter
Deductions not allowed in calculating company’s income for quarter
Quarters 30/9; 31/12; 31/3; 30/6
Instalments 21/10; 21/1; 21/4; 21/7
.
Treatment of loss carry forward


Subdiv 165A
A company cannot deduct a tax loss unless:
o It has the same owners and same control throughout the period from the start of the
loss year to the end of the income year, i.e. satisfies the Continuity of Ownership Test
(COT) s165-12 or
o It carries on the same business in the income year as it carried on between loss year and
when COT test was failed, i.e. satisfies the Same Business Test s 165-14
 Identical business (Avondale Motors case)
 Entering into no new kinds of transactions
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
Conducting no new kinds of business
Dividend Imputation System



Simplified imputation system contained in part 3-6 ITAA97
Imputation system allows resident companies to frank distributions (i.e. impute corporate tax
they have paid, to their shareholders)
Policy rationale – aims to overcome problem of double taxation
Key obligation of companies




Maintaining the Franking Account
Franking a dividend
Maximum franking credit
Benchmark franking rule
Franking Distributions




Franking involves a corporate tax entity allocating tax it has paid to ‘frankable distributions’
Corporate tax entities maintain ‘franking accounts’
Franking credits arise under s205-15
Franking debits arise under s205-30
The Franking Account
Company must maintain Franking Account
Franking credits:
 Payment of tax or PAYG instalments
 Receipt of franked distribution
 Payment of franking deficit tax (where an entity has a deficit in its franking account at the end of
an income year)
Franking debits:
 Refund of company tax
 Payment of a franked distribution
Frankable Distributions




Company must be a resident at a time of distribution
S 202-15, 202-20
A ‘frankable distribution’ is a distribution that is not ‘unfrankable’ (s 202-40)
A distribution is ‘unfrankable’ if it falls within s202-45
o Eg. deemed dividends under s109 or Div 7A
Maximum Franking Credit

S202-60 Maximum franking credit for a distribution = amount of distribution x 1/applicable
corporate gross up rate
Corporate tax gross-up rate =
(100% - corporate tax rate for imputation purposes of the entity for the income year)
(corporate tax rate for imputation purposes of the entity for the income year)
Maximum franking credit – calculation
Where 30% corporate rate applies:
 Amount of frankable distributions x 1/1-0.30/0.30
93



Amount of frankable distribution x 1/70/30
Amount of frankable distribution x 1/2.33 (to 2 decimal places only)
Amount of frankable distribution x 0.4292
Where 27.5% corporate tax rate applies:
 Amount of frankable distribution x 1/1-0.275/0.275
 Amount of frankable distribution x 1/72.5/27.5
 Amount of frankable distribution x ½.64 (approx.)
 Amount of frankable distribution x 0.3788
Benchmark Franking Rule






S203-25 must frank to benchmark % within a franking period
Benchmark % = Franking % for first distribution in franking period s203-35
Franking % s203-35
Franking credit attached/maximum franking credit
Franking period
o For private company: s203-45 – income year
o For public company: s203-40 – 6 month periods
Consequences of breach of Benchmark Franking Rule:
o If frank to greater % - overfranking tax s203-50(1) and s203-50(2)(b) – not creditable
o If frank to lesser % - franking debit s 203-50(2) and s203-50(2)(b)
o In extraordinary circumstances the Commissioner may permit departure from
benchmark rule s203-55
Impact on Shareholders – ‘Gross-up and credit’ mechanism
For resident individual shareholder –
 ITAA36 s44(1) inclusion of dividend paid out of profits in shareholder’s assessable income
 Gross up for franking credit s207-20(1)
 Calculation of tax for shareholder applying progressive rates
 Tax offset equal to the amount of franking credit s207-20(2)
Example
CorpCo is a resident company that has profits of $10,000 in 2017/18. It is required to pay tax on his
amount at the rate of 30% (i.e.$3,000). CorpCo has one shareholder Jack who is a resident that pays tax
at the top marginal rate of 45%. Out of its after-tax profits, CorpCo is able to pay Jack a dividend of
$7,000. This dividend can be fully franked (i.e. franking credits of $3000 can be attached). Jack will be
taxed on the dividend as follows:
Impact on Shareholders
For foreign resident individual shareholder:
 Franked portion exempt from withholding tax IAA36 s128B(3)(ga)
 Withholding tax 30% (unless there is a double tax agreement)
94



Franked portion not subject to Australian tax on assessment basis ITAA36 s 128D
Not entitled to imputation gross ups and credits s207-70; s207-75
Not assessed and no withholding tax on conduit foreign income ITAA 1997 s802-15
S 6(1) Definition of ‘dividend’
A dividend includes:
 A ‘distribution’ made by a company to its shareholders, and
 Any amount ‘credited’ by a company to its shareholders as shareholders
A dividend does not include
 Amounts debited against the company’s ‘share capital account’
 Certain monies etc for the redemption or cancellation of redeemable preference shares
Deemed Dividends
S109, ITAA36
 Where a private company:
o Pays or credits an amount to an ’associated person’ as ‘remuneration’
o That in the opinion of the Commissioner is ‘excessive’
 The commissioner may treat the excessive portion of the payment as a dividend
Div 7A
 A private company is deemed to have paid a dividend where:
o It pays an amount to a shareholder or an associate of the shareholder (s109C)
o It makes a loan during an income year to a shareholder or an associate of the
shareholder which is not fully repaid by the ‘lodgment day’ (s 109D)
o It forgives a debt it is owed by a shareholder or an associate of the shareholder (s 109F)
 But this does not apple to:
o Payments of genuine debts (s109J)
o Payments and loans to other companies (s109K)
o Payments and loans that are otherwise assessable income (s109L)
o Loans made in the ordinary course of business on ordinary commercial terms (s109M)
o Loans made in writing that meet minimum interest rate and maximum term
requirements
Consolidation Regime


A wholly owned resident corporate group can elect to be taxed as one single taxpayer
Advantages: eg
o Can offset taxable income and other tax losses among group members
o Tax free transfers of assets within group
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Goods and Services Tax (GST)
Background





Introduced on 1 July 2000
Replaced the Wholesale Sales Tax
Broad-based consumption tax
A tax on supply transactions (Sterling Guardian)
A New Tax System (Goods and Services Tax) Act 1999
Key Features





Payable at 10% on ‘taxable supplies’ and ‘taxable importations’ in the period (s7-1)
Supplier subtracts ‘input tax credits’ (GST paid) on purchases or creditable imports (s7-5)
Supplier adds any ‘increasing adjustments’ (increases GST payable)
Supplier subtracts any ‘decreasing adjustments’ (decreases GST payable)
Net result = GST payable/refundable (s7-15)
Example




Timber supplier supplies timber to manufacturer for $20 (+$2 GST); forwards ($2-0) = $2 to ATO
Manufacturer processes into timber beams, sells to carpenter for $40 (+$4 GST); forwards ($4-2)
= $2 to ATO
Carpenter makes the timber beams into furniture, sells to retailer for $80 (+$8 GST); forwards
($8-4) = $4 to ATO
ATO collects $2 + $2 + $4 + $2) = $10 GST ($100 x 10%)
S9-5 What is a ‘taxable supply’?





A ‘supply’ for consideration
In the course of or furtherance of an enterprise that you carry on
Connected with the ‘indirect tax zone’ (Australia)
By a person who is registered or required to be registered
The supply is not input taxed or GST free
A ‘supply’





S9-10(1) broad definition
Any form of supply whatsoever
Examples
o Provision of advice
o Supply of goods/services
o Creation/transfer/surrender of any right
o Entry into/release from an obligation to do/refrain from something/ tolerate something
o Combination of the above
Note: doesn’t matter if what you’re doing is unlawful
Eg. British Airways, Qantas Airways
For consideration





The supply must be for the consideration
S9-15 broad definition of consideration
Any form of payment
Any voluntary/involuntary, payment/act/forbearance by recipient or 3rd party in connection with
the supply
Amount of consideration = $ money paid or market value of goods/services (GST inclusive)
96

Supply of option is taxed when the option is supplied (subsequent exercise of option is only
subject to GST if there is additional consideration)
Enterprise



Carrying on/out an enterprise includes anything done in the course of
commencement/termination of the enterprise
S9-20(1) broad definition
o An activity or series of activities done:
 In the form of a business/professional/trade
 An adventure or concern in nature of trade
 On a regular or continuous basis via lease/license/other grant of interest in
property
 By trustees of funds to which tax-deductible gifts can be made, or trustees of
complying superannuation funds
 By a charitable or religious institution
 By the Cth/State/body corporate or corporation solely for public purpose
Exclusions
o Activities done as an employee
o Activities done as private recreational pursuits/hobbies
o Activities done by individual/partnerships with no reasonable expectation of profit/gain
o Activities done as a member of certain local governing bodies in that capacity
Indirect Tax Zone





S195-1 definition
‘Indirect Tax Zone’ = Australia (excluding the external territories & certain offshore installations)
Supply is ‘connected with the Indirect Tax Zone’ if:
o The goods are delivered/made available in Australia to recipient
o The goods are removed/brought into Australia (including being installed and assembled)
Examples:
o Services performed in Australia
o Supply of real property that is in Australia
o Supply is made through an enterprise carried on in Australia
o Recipient is an Australian customer
o Saga Holidays: rights/options to acquire another thing where that thing’s supply would
be connected with Indirect Tax Zone
Exclusions: ss 9-26, 9-27
Registration




May be compulsory or optional
Can only be registered if you are ‘carrying on an enterprise’
Compulsory if annual turnover (current/projected) is $75,000 or more (ss23-5, 23-15)
Optional if carrying on an enterprise however below the threshold
Supply must not be GST free or input-taxed
‘GST Free’ = no GST payable on supply, however supplier is entitled to claim input tax credits for any GST
paid on purchases
 Div 38 list
 Some examples include certain:
o Food
o Education and child-care
o Medical/health services
o Exports
97
o
Second-hand goods
Input-taxed supplies
‘Input taxed’ = no GST payable for supply, however supplier is NOT entitled to input tax credits on supply
 Some examples include:
o Financial supplies
o Certain sales/leases of residential premises
o Precious metals
o Supply of food by school canteen/tuckshop
o Fundraising activities by charitable institutions
Charging GST
Supplier is generally liable for GST at 10% on the ‘net amount of supplies they make in a tax period (ss 940, 195-1)
 Example: Computer shop sells John a laptop for $2,200 for use in John’s business. The supply by
the Computer Shop is a taxable supply, and the price charged includes 10% GST (1/11th x $2,200
= $200)
 The GST is generally allocated to the tax period in which either any consideration is received, or
an invoice is issued relating to a supply (s29-5(1)
Obtaining Input Tax Credits










Can only attach to a ‘creditable acquisition’
S 11-5 definition of ‘creditable acquisition’
An acquisition solely or partly for a creditable purpose (i.e, to the extent it is carrying on an
enterprise (s11-15(2))
Via a taxable supply for consideration
By a person who is registered or required to be registered
See also ‘creditable important’ Div 15
Not a creditable purpose to the extent the purpose of acquisition is of a private/domestic nature,
or relates to making of input taxed supplies
A person making a ‘credit acquisition’ is entitled to an Input Tax Credit 1/11th of the cost of the
acquisitions (s9-75, i.e. the amount of GST paid on the acquisitions)
Following 2012, the right to claim ITCs will be lost unless either:
o The credit has been taken into account in an assessment within 4 years of the date on
which the GST return was due (s93-5), or
o An exception applies (ss93-10(1)-(5))
Where the proportion of creditable use changes, the taxpayer must adjust the claim for ITCs
accordingly
How to Calculate Amount of GST Payable
S9-70 GST is imposed at 10% of the value of the taxable supply
 Valuable of taxable supply – price x 10/11 (s9-75)
 Example:
o Price: $33,000
o Value: $33,000 x 10/11 = $30,000
o GST Payable = $30,000 x 10% = $3,000 (or price x 1/11)
GST Adjustments – Increasing and Decreasing Adjustments
Increasing Adjustments
Where the amount of GST paid changes, an appropriate adjustment needs to be made
 Eg. where the consideration paid increases or ITCs decrease
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

Jack pays Jill $1,000 for a business computer. Subsequently, they realise the correct price was
$1,500, so Jack pays Jill a further $500
Jack will need to adjust the ITCs upwards (reducing the GST) and Jill will need to adjust the
consideration received upwards (increasing the GST payable)
Decreasing Adjustments


Examples:
o Write-off of bad debts
o Cancellation of supply/acquisition
o Changes to a consideration
o Supply becomes or ceases to be taxable
o Acquisition becomes or ceases to be creditable
Tom pays Jerry $22,000 for services, and Jerry remits $2,000 GST to the ATO. Tom later
complains about the cost of the services, and jerry refunds $5,500. Jerry needs to make a
decreasing adjustment of 1/11th x $5,500 ($500) which reduces the GST payable, and Tom must
make an increasing adjustment to reduce the ITC credits by $500, which increases the GST
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Tax Planning, Administration and Anti-Avoidance
Tax Avoidance vs Planning vs Evasion



Tax avoidance: within the law technically, but against the spirit of the law
Tax planning: exploiting legitimate opportunities available under tax law to minimise tax
Tax evasion: illegal
Anti-Avoidance provisions

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Legislative response to Tax Avoidance
General anti-avoidance provisions vs. specific anti-avoidance provisions
History/background: general anti-avoidance provisions
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Former s260 ITAA36 was read down by the courts
Pt IVA, ITAA36 introduced in 1983
2013 amendments
Pt IVA, ITAA36
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General rule s177D and
Basically 5 specific rules:
o 177E dividend stripping schemes
o 177EA franking credit trading schemes
o 177EB franking credit trading re consolidated groups
o s 177DA Multinational Anti-Avoidance Law (MAAL)
o s 177J Diverted Profits Tax (see Diverted Profits Tax Act 2017)
Overview: General Rule s 177D
1. Taxpayer must obtain ‘tax benefit’ under a ‘scheme’
a. Note: scheme must be entered into/carried out/commenced to be carried out, after 27
May 1981
2. Would it be concluded, having regard to the matters specified in s177D(2), that the purpose of
the person (or one of the persons) who entered into or carried out the scheme was to enable a
taxpayer (and another taxpayer/taxpayers) to obtain a tax benefit in connection with the
scheme?
Effect of General Rule s177D
If above requirements are satisfied, the Commissioner may make:
 Determination to cancel the whole/part of the tax benefit
 Fair/reasonable compensating adjustments
See s177F
What is a ‘scheme’?
S177A(1) definition
‘scheme’ means:
a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and
whether or not enforceable, or intended to be enforceable, by legal proceedings; and
b) any scheme, plan, proposal, action, course of action or course of conduct
 FCT v Peabody (1994) 181 CLR 359
 Fct v Hart v Anor 2004 ATC 4599
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What is a ‘tax benefit’?
S177C(1)
 Not including an amount in assessable income
 Obtaining a deduction not otherwise allowed
 Capital loss being incurred that would not otherwise be incurred
 Obtaining a Foreign Income Tax Offset that would not otherwise be allowed
 Obtaining an Innovation Tax Offset would not otherwise be allowed
 Obtaining an exploration credit that would not otherwise be allowed
 Not incurring liability for withholding tax (after 20 Aug 1996)
See also IT2456
S177C(1)
 ‘if the scheme had not been entered into or carried out’
 FCT v Peabody (1994) 191 CLR 359
 FCT v Hart & Anor 2004 ATC 4599
 FCI Pty Ltd v FCT 2011 ATC 20-275
 Pt IVA: did not apply because it would not be reasonable expected that if the scheme was not
entered into or carried out, the taxpayer would have disposed of the shares in the foreign
subsidiary in a way which produced such a large capital gain. If the scheme was not entered into
or carried out, it would be reasonable to assume the taxpayer would have either done nothing or
chosen another alternative that did not result in such a large capital gain (see legislative
response)
S177C(2)
 Limited ‘choice’ principle
 No tax benefit arises if the benefit is attributable to the making of an agreement, choice,
declaration, election or selection, the giving of a notice, or the exercise of an option, expressly
provided for by the legislation
 However, this exclusion does not apply if the scheme was entered into or carried out for the
purpose of creating the circumstances necessary to enable the making of the agreement, choice,
declaration, etc
Tax benefit – 2013 amendments
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S177CB(2): conclusion that tax effect would have occurred if the scheme had not been entered
into or carried out, must be based on events, other than the scheme, that actually happened
 S177CB(3): conclusion that tax effect might reasonably be expected to have occurred must be
based on a reasonable alternative to entering into the scheme (reconstruction approach)
 S177CB(4): for the purpose of
(3) (a) have a particular regard to
(i) The substance of the scheme; and
(ii) Any result/consequence for the taxpayer that would be achieved by the scheme (other than a result
under ITAA36 or ITAA97); but
(b) Disregard any result under ITAA36 and ITAA97 that would be achieved by any person (legislative
response to RCI Case)
‘Purpose’
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Look at the purpose of a person who entered into or carried out the scheme (doesn’t have to be
the person who obtains the tax benefit)
Dominant purpose
Determined objectively with regard to matters specified in s177D(2)
Purpose of professional adviser can be attributed to taxpayer (FCT v Consolidated Press Holdings
& Anor 2001 ATC 4343)
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S177D(2) matters specified:
(a) the manner in which the scheme was entered into or carried out;
(b) the form and substance of the scheme;
(c) the time at which the scheme was entered into and the length of the period during which the scheme
was carried out;
(d) the result in relation to the operation of this Act that, for this Part, would be achieved by the scheme;
(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may
reasonably be expected to result, from the scheme;
(f) any change in the financial position of any person who has, or has had, any connection (whether of a
business, family or other nature) with the relevant taxpayer, being a change that has resulted, will reslt or
may reasonably be expected to result, from the scheme);
(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the
scheme having being entered into or carried out;
(h) the nature of any connection (whether of a business, family or other nature) between the relevant
taxpayer any any person referred to in paragraph (f)
Multinational Anti-Avoidance Law s177DA
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Operates from 1 Jan 2016
Targets schemes involving large foreign multinationals using artificial arrangements to avoid
having a taxable presence in Australia
Irrespective of when or where the scheme was entered into or carried out
Returns and Assessment
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Self-assessment system
o Lodge return
o Electronic filing
Notice of assessment
o Name
o Taxable income
o Tax owing
o Date tax payable
Amendment and Reassessment
At any time there is fraud, tax evasion
Other avoidance, etc – 4 years
In response to tribunal or court decision – no time limit
Objections, Reviews and Appeals
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Notice of assessment
Objection – TAA
Must state grounds ‘fully and in detail’
Usually must lodge within 4 years unless Commissioner grants extension
Commissioner’s notice of decision – may allow (in full or part) or disallow
Commissioner’s decision is reviewable, appellable, or generally both
Go to Federal Court or AAT
Onus of proving the assessment is excessive – on the taxpayer
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