NOTES&FROM&TAX&LAW&I&
Residence&and&source&
•
•
A"resident"of"Australia"for"tax"purposes"will"be"taxed"on"income"from"all"sources"s665(2)"ITAA97"
A"foreign"resident"for"tax"purpose"will"be"taxed"on"income"from"Australian"sources"only"s665(3)"ITAA97"
4&RESIDENCY&TESTS&in&s6(1)&ITAA36:&(must&do&all&4&tests)&
1. Ordinary&resident&test&
Tax"Payer"is"a"resident"if"resides"in"Australia"
Usual"place"of"abode"
Factors"in"applying"this"test:""
!
Physical"presence"in"Australia"
!
Frequency,"regularity"and"duration"of"visits"
!
Purpose"of"the"visits"to"Australia"and"aboard"
!
Maintenance"of"a"place"of"abode"in"Australia"during"absences"
!
Family,"business"and"social"ties"
!
Nationality"
2. Domicile&test&
Australian"resident"includes"a"person"whose"domicile"(legal"concept6"citizen"or"permanent"resident,"not"where"you"live)"is"in"Australia"unless"
the"Commissioner"is"satisfied"that"the"tax"payer"has"a"permanent"place"of"abode"overseas."
2"categories"of"domicile:"
!
Domicile"of"origin"
!
Domicile"of"choice"
o Intention"to"stay"indefinitely"
Place"of"abode6"home"or"presence"outside"Australia"(Applegate(1979)[CS4.4])"
Permanent6"Not"forever."Takes"its"meaning"from"its"context"(Applegate"(1979)"[CS4.4])"
(Jenkins,"(1982)"[CS"4.5])"
Domicile"is"not"Australia="Domicile"test"is"not"relevant"
Not"resident"if"Australia"is"not"permanent"place"of"abode"and"no"intention"of"residency"in"Australia."
Factors"to"be"taken"into"account:"(IT"2650)"
!
!
!
!
!
The"intended"and"actual"stay"in"the"foreign"country"
Duration"and"continuity"of"TP’s"presence"in"overseas"country"
Establishment"of"a"home"outside"Australia"(more"than"temporary"accommodation)"
Residence"or"place"of"abode"in"Australia"
The"durability"of"the"association"with"Australia"(in"particular,"maintenance"of"bank"accounts,"education"of"children,"family"ties,"
notifying"government"departments)"
3. 183&day&test&
Tax"Payer"will"be"treated"as"a"resident"if"the"TP"has"been"here"for"183"days"or"more"unless"the"commissioner"is"satisfied"that"the"person’s"usual"
place"of"abode"is"outside"Australia"and"the"person"does"not"intend"to"take"up"residence"in"Australia."
"
If"test"is"satisfied,"tax"payer"is"treated"as"Australian"tax"resident"for"whole"of"the"income"year."(Executors"of"the"Estate"of"Subrahmanyam"
(2002)"but"note"Groves"v"FCT"(2011)"AATA"609)"
4. Superannuation&test&
Members"of"certain"commonwealth"funds"are"deemed"to"be"Australian"residents"
Basic&formula&
Tax&Payable&=&(Taxable&Income&*&Tax&Rate)R&Tax&Offsets&(s4R10&ITAA97)&
Taxable"Income="Assessable"Income"–"Deductions"(s4615"ITAA97)"
Assessable"Income=""
Ordinary"Income"(s665)"AND""
Statutory"income"(s6610)""BUT"NOT""
Exempt"Income"(s6615)"
Deductions=""
General"deductions"(s861)"AND""
specific"deductions"(s865)"
Ordinary&Income&
Ordinary"income"is"the"income"according"to"ordinary"concepts:"s665"ITAA97"
Features"of"ordinary"income:"
1. Sufficient"nexus"with"an"income"earning"activity"(income"from"services,"business"or"property)"
2. NOT"a"capital"gain"(Once"you"sell"it,"you"will"only"get"a"one"off"discrete"amount"from"it)"(Eisner"v"Macomber"
1920)"
Statutory&Income"
Amounts"that"are"included"in"assessable"income"by"specific"provisions"of"the"income"tax"legislation"subsection"66
10(2)"
Examples:"
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•
•
•
•
•
•
Return"to"work"payments"(s1563)"
Bounties"and"subsidies"(s15610)"
Royalties"(s15620)"(Ordinary"income"as"well)"
Dividends"(s44(1))"(Ordinary"income"as"well)"
Allowances,"etc"for"employment"services"(s1562)"(Ordinary"income"as"well)"
Net"capital"gains"(s10265)"(Not"ordinary"income,"only"assessable"as"statutory"income)"
Income"from"trust"
Overlap"between"ordinary"income"and"statutory"income:"Amount"will"only"be"included"in"assessable"income"once"
(s6625(1)),"usually"statutory"income"prevails"(s6625(2))"
Constructive"receipt"rule:"You"can’t"get"out"of"an"amount"by"directing"it"be"paid"to"someone"else,"if"its"dealt"with"as"
per"your"directions"it"is"your"assessable"income"s6610(3)"
General&deduction&rule&(s8R1&ITAA97&formerly&s51(1)&ITAA36)&
A"taxpayer"can"deduct"from"assessable"income:"
1. A"loss"or"outgoing"
2. Incurred"during"the"year""
To"the"extent"that"it"is:"(positive"limbs)"
1. Incurred"in"gaining/"producing"assessable"income"or"
2. Necessarily"incurred"in"carrying"on"a"business"for"the"purpose"of"gaining/producing"assessable"income.""
BUT"NOT"to"the"extent"that"it"is:"(negative"limbs)"
1. Capital"or"capital"in"nature"or""
2. Private"or"domestic"in"nature"or""
TAX&LAW&II&
TAXATION&OF&COMPANIES&AND&SHAREHOLDERS&
‘Company’&definition&s995R1&ITAA97:&&
A"body"corporate;"or"any"other"unincorporated"association"or"body"of"person.""
But"does"not"include"a"partnership"or"a"non6entity"joint"venture."
Separate"legal"entity""
May"be"public"or"private"
o Public:"generally"listed"on"the"stock"exchange."S103A(2)"ITAA36"
o Private:"Any"company"that"isn’t"a"public"company."S103A(1)"
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•
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&‘Public&officer’:&
•
•
•
Every"company"carrying"on"business"or"deriving"property"income"in"Australia"must"appoint"a"public"officer."s"
252"ITAA36"
The"public"officer"must"be"a"resident,"a"natural"person"aged"at"least"18"years"
For"income"tax"law,"the"public"officer"is:""
o Responsible"for"documents"served"on"them""
o Answerable"for"all"obligations"imposed"on"the"company""
o Liable"to"the"same"penalties"as"the"company"if"the"company"defaults."
Company&test&of&residence:&(Only"1"out"of"3"tests"needs"to"be"satisfied"for"a"company"to"be"considered"a"tax"of"
resident"of"Australia6"do"in"order)"
A"company"will"be"charged"a"flat"rate"of"30%"regardless"of"residency"status.""
1. Place&of&incorporation&test:&
A"company"that"is"incorporated"(formed/set"up)"in"Australia"under"the"Corporations"Act"2001"is"automatically"a"tax"
resident"of"Australia,"regardless"of"any"other"factors.""
2. Central&management&and&control&test:&(both&limbs&need&to&be&satisfied)&
LIMB"1:"The"Company"must"carry"on"business"in"Australia""
o
o
Consider"where"the"activities"of"company"are"carried"on"&"facts"and"circumstances"of"the"case."
TR"2004/15:""
! For"operational"activities6"business"is"carried"on"where"activities"take"place""
(e.g."trading,"provision"of"services,"manufacturing"or"mining"activities)"
! For"passive"activities6"business"is"carried"on"where"decisions"in"respect"of"those"activities"are"made"
(e.g."investment"of"assets)""
LIMB"2:"The"company’s"central"management"and"control"must"be"located"in"Australia."
o
o
Consider"where"‘real"control’""of"company"is"located,"taking"into"account"the"following"factors:""
"
! Location"where""actual"high"level"decision"making"processes"are"made/developed""
(e.g."general"policy"and"strategic"directions,"major"agreements"and"significant"financial"matters)"
! Where"the"monitoring"of"overall"corporate"performance"occurs"
! Malayan&Shipping&Co&Ltd&v&FCT&(1946):&Central"management"and"control"of"the"company"will"be"the"
location"of"the"actual"decision"making,"rather"than"the"formal"execution"of"the"director’s"resolutions&
Day"to"day"control"over"the"business"operations"of"a"company"does"not"amount"to"central"management"and"
control"of"the"company."(Koitaki"Para"Rubber"Estates"v"FCT"1940)"
TAXATION&OF&DIVIDENDS&
S44"ITAA36:"The"assessable"income"of"a"resident"shareholder"in"a"company"includes:"
a) Dividends"paid"to"the"shareholder"by"the"company"out"of"profits"derived"from"any"source;"and"
b) All"non6share"dividends"paid"to"the"shareholder"by"the"company."
"‘Shareholder’:""
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•
•
•
•
•
•
s6"ITAA36:"Shareholder"is"a"member"or"stockholder"
Can"be"individual"or"company.""
Entry"on"company’s"register"of"members"necessary"to"constitute"membership"of"a"company:"Patcorp&
Investments&Ltd&v&FCT"
Must"be"a"legal"owner"of"the"share""
A"person"with"beneficial"ownership"of"shares,"but"without"registration,"generally"would"not"be"a"
shareholder.""
Holders"of"‘equity"interest’"are"treated"in"the"same"way"as"shareholders:"s43B(1)(b)"of"the"ITAA"36""
Equity"interest:"s974675"ITAA97."""
"‘Dividends’:""
•
•
Any"distribution"made"by"a"company"to"its"shareholders,"whether"in"money"or"other"property"and"any"
amount"credited"by"company"to"its"shareholders"as"shareholders"s6(1).""
Excludes:"‘money"paid"or"credited"by"a"company"to"a"shareholder"where"the"amount"is"debited"against"the"
share"capital"amount"of"the"company’""
"‘Share"capital"account’:""
•
An"account"which"the"company"keeps"of"its"share"capital"s9756300"
‘Tainted"share"capital"account’:""
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•
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Occurs"when"a"company"capitalises"profits"and/or"transfers"from"other"accounts"of"the"company"into"the"
share"capital"account:"s"197650.""
Not"a"share"capital"account"for"tax"purposes.""
Anti6avoidance"rules"apply"e.g."Dividends"deemed"to"be"paid"out"of"profits"and"hence"assessable"s44"(1B)."
Franking"debit"arises"in"the"company’s"franking"account.""
‘Non"share"dividends’:""
•
•
Distributions"made"by"a"company"to"holders"of"its"non6share"equity"interest"ss9746115"and"9746120""
All"shares"are"a"form"of"equity"interests,"but"there"are"some"forms"of"equity"interests"that"don’t"constitute"
shares"so"therefore"they"are"non6share"equity"interest.""
‘Paid’:""
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•
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Credited"or"distributed"s6(1).""
Dividend"is"paid"when"it"is"credited"and"irrevocable"(when"dividend"is"actually"paid):"Brookton"Co6operative"
Society"Ltd"v"FCT.""
When"company"forgives"a"debt"of"shareholder6"the"gain"was"not"paid"to"shareholder"within"the"meaning"of"
s44"(FCT"v"Black)"
‘Profits’"
•
•
•
Income"(including"exempt"income)"will"be,"in"general,"profits"and"therefore"taxed"as"dividends"in"the"
shareholder’s"hands."(FCT"v"Slater"Holdings"Pty"Ltd)""
S245T"allows"a"company"to"pay"dividends"if"the"company’s"assets"exceed"its"liabilities"before"the"dividend"is"
declared"
Anti6avoidance:"A"dividend"paid"out"of"an"amount"other"than"profits"is"also"deemed"to"be"a"dividend"paid"
out"of"profits"for"income"tax"purposes"s"44(1A)"
Deemed"dividends"for"private"companies"DIVISION"7A"
•
Lower"corporate"tax"rate"is"an"incentive"for"taxpayer"to"accumulate"profits"in"the"company."(Individual"taxpayer"
assessed"at"marginal"rate"up"to"45%"whilst"company"taxpayer"is"assessed"in"the"company"at"the"rate"of"30%)"
Avoidance"issue:""
•
Schemes"used"by"private"companies"to"pass"benefits"(I.e."us"of"profits)"to"shareholders"while"avoiding"the"
payment"of"dividends"include:"
o Paying"excessive"salaries"or"fees"paid"to"shareholders"
o Making"payments"and"loans"to"shareholders"
o Transfer"of"property"between"a"company"and"its"shareholders"at"non6arm’s"length"prices"
Excessive"salaries"or"fees"paid"to"shareholders"s109(1):"
To"the"extent"that"salaries"or"fees"for"services"provided"by"a"shareholder"(or"associate)"are"excessive,"that"portion"is:""
•
•
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Deemed"to"be"a"dividend"to"the"shareholder"and""
Is"not"deductible"to"the"company.""
Deemed"dividends"are"unfrankable"
Provisions"that"deem"certain"kinds"of"amounts"paid"by"a"private"company"to"a"shareholder"(or"associate)"as"
dividends:"
•
•
•
Payments"s109C"ITAA36"
o Payments"made"to"shareholders"(or"associates)"are"treated"as"deemed"dividends"
o Payments:"Any"payment"or"credit"to,"on"behalf"of,"or"for"the"benefit"of,"the"shareholder"and"includes"
the"transfer"of"property"or"the"provision"of"an"asset.""
o Excludes:"Payment"to"discharge"an"arm’s"length"debt"s109J"and"payment"to"corporate"shareholders"
s109K"
Loans"s109D"ITAA36"
o "Loans"made"to"shareholders"(or"associates)"that"are"not"repaid"by"the"“lodgment"date”"constitutes"a"
deemed"dividend.""
o Loan:"Advanced"provision"of"credit."
o Lodgment"date:"earlier"of"due"date"and"the"date"you"file"tax"return"
o Exclusions"include:""
! "Loans"made"to"a"corporate"shareholder:"s"109K.""
! Loans"made"in"the"ordinary"course"of"business"of"the"private"company"on"arm’s"length"terms"
s109M"
! "Loans"meeting"criteria"s"109N:"
• (i)"written"loan"agreement;""
• (ii)"minimum"commercial"interest"rate;"and""
• (iii)"maximum"term"of"loan"
Debt"forgiveness"s109F"ITAA36"
o Debts"owed"by"shareholders"of"private"companies"that"are"forgiven"constitute"a"deemed"dividend."
1. It"has"to"gross"up"its"assessable"income"by"the"amount"of"the"franking"credit"s207620(1)"and"
2. It"is"entitled"to"claim"a"tax"offset"by"the"same"‘gross"up’"amount"s207620(2)"
"
Taxable&income=&Assessable&incomeR&Deductions&
Resident"individuals:"Franking"credit"tax"offset"is"refundable"if"it"exceeds"the"resident"individual’s"income"tax"payable"
Resident"partnerships"and"trusts"as"shareholders:"Franked"distributions"are"traced"through"so"that"partners"and"trust"
beneficiaries"receive"their"share"of"the"distribution"and"franking"credits"
Non6resident"shareholders:""
•
•
•
“Gross"up"and"offset”"mechanism"not"available"to"non6resident"shareholders:"s"207620.""
Treated"generally"as"non6assessable"non6exempt"income"in"the"hands"of"the"non6resident"
shareholder:"s"128D"ITAA36.""
Withholding"tax"applies"to"unfranked"dividends."
"
Integrity"measures:"
Benchmark"rule:""
•
•
•
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Counteracts"streaming"arrangements6"ensures"that"one"member"of""corporate"tax"entity"is"nor"preferred"
over"another"when"the"entity"franks"distributions""
All"distributions"in"a"franking"period"must"be"franked"to"the"same"benchmark"franking"percentage"s203625"
o Over6franking:"Franking"percentage>Benchmark"franking"percentage."Liable"to"pay"over6franking"tax"
(s"203650(1)).""
o Under6franking:"Franking"percentage<"Benchmark"franking"percentage."Debit"in"the"franking"account"
(s"203650(1)(b)).""
o Commissioner"may"permit"deviation"from"the"benchmark"rule"in"extraordinary"circumstances:"s"2036
55."
Franking"percentage"of"the"first"frankable"distribution"in"the"franking"period"s203630"
Franking"percentage="
!"#$%&$'!!"#$%&!!""#$!%&'!!"!!ℎ!!!"#$%#&'(!!"#$%"&'$"()
"
!"#$%&%!!"#$%&$'!!"#$%&!!"#!!ℎ!!!"#$%"&'$"()
Qualified"person:"
•
&
Use"of"the"‘grossed"up"and"tax"offset’"mechanism"is"denied"if"the"distribution"is"made"to"a"person"that"is"not"
a"‘qualified"person’"s2076145"(1)"(a)""
o Qualified"person:"a"shareholder"that"holds"the"shares"at"least"45"days"(90"days"for"preference"shares)"
o Individual"shareholders"with"relatively"small"shareholdings"(tax"offset<$5000"and"no"related"
payment"with"respect"to"the"dividends)"are"exempt"from"the"‘qualified"person’"test"s160APHT"
&