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AYB219 Course Notes

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AYB219 – Taxation Law and Practice Notes Lecture 1 – Introduction  Two general types of tax: o Direct taxes – taxes are levied on the person who is liable to pay the tax, e.g. income tax o Indirect taxes – tax is passed onto consumers by incorporating the taxes into the price of goods & services, e.g. GST  Historical background of tax o 1902-1915: Queensland levied personal income tax o 1915-1942: Both state and commonwealth governments levied income tax o 1942: Commonwealth Government gained sole control of income tax under the Income Tax Assessment Act (1936)  Constitutional Basis of Taxation o s51 of constitution  “The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: (i) Trade and commerce with other countries, and among the States: (ii) Taxation; but so as not to discriminate between States or parts of States”. o s55 of constitution  “Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect. Laws imposing taxation shall deal with one subject of taxation only”.  Taxation Acts o Income Tax Assessment Act (ITAA)  Deals with incidence, assessment & collection of tax  Determines taxable income on which income tax is levied  Does not “impose taxation”  Two ITAAs, 1936 and 1997  1963 is difficult to understand  The ITAA 1997 overrules the ITAA 1936 o Income Tax Rates Act  Imposes and fixes the rate of taxation  Administration of Income Tax o ATO enforces compliance, parliament sets tax rates o Taxpayers charter sets out a taxpayers rights, but it is statement of intention with no legal force  Sources of taxation law and rules o Statute law  ITAA (1936 / 1997)  FBT Assessment Act (1986)  Taxation Administration Act (1953) o Case law  Administrative appeals tribunal -> federal court -> full federal court -> high court o ATO Tax Determinations & Tax Rulings  Not law  Commissioner’s opinion on how a particular aspect of tax law should be interpreted  Two types of rulings: public (for everyone) and private (for a particular person’s case) Page 1 of 98 AYB219 – Taxation Law and Practice Notes Assessing Income Tax Ordinary Income  Income is not defined in ITAA 1936 or 1997  Determined by the courts (case law) o Developed “income according to ordinary concepts” o Leading case: Scott v C of T (1935) SR (NSW) 215 o 9 characteristics  What comes into the pocket  Tennant v Smith (1892) AC 150 o Amount must come home to the taxpayer o Unrealized gains and saving from not incurring expenditure (fixing the toilet yourself) is not income o Money doesn’t have to be physically received (i.e. may be in the form of receiving shares)  Money or money’s worth  Income received must be: o Money o Capable of being converted into money  E.g. barter arrangements (someone washes the dishes for you instead of paying for their meal) o FCT v Cooke & Sherden 80 ATC 4140  Resulted in the addition of s21A ITAA (1936) that business related gains are income  Income in the hands of the person that has derived it  Tax is paid by the person who derives the income  Often exhibit periodicity, recurrence and regularity  More regular receipts are more likely to be income  Not essential to be considered income Page 2 of 98 AYB219 – Taxation Law and Practice Notes  Normal proceeds of personal exertion, property or business are income  Personal exertion – income  Return on investment – income  Carrying on a business – income  Unless a pastime of hobby  Compensation receipts may be income if it replaces a revenue loss  Compensation receipts: same character as the item/amount it replaces o e.g. compensation for loss of wages = ordinary income o e.g. compensation for loss, surrender or substantial impairment of a capital asset = capital  Higgs v Oliver (1951), TC 899  Even if the receipt is illegal, immoral etc. it may be income  Same test for legal & illegal activities (i.e. 9 characteristics)  Proceeds of illegal activities are assessable as income o e.g. drug dealing, burglary, illegal bookmaker etc  “Mutual” receipts are not income  Principle of mutuality: a person cannot derive income by dealing with themselves o i.e. only income if derived from external sources o e.g. income derived by members of a club/association = generally not assessable o income from non-members (visitors) = generally assessable  Capital gains are not income  Sale of a capital asset = capital gain o Not income according to ordinary concepts  I.e. fruit generates income but sale of the tree does not  Reportable under capital gains tax since 1985 Exempt Income  s6-20 ITAA 1997  Income that is ordinary or statutory income  But specifically made exempt from income tax by: ITAA or other commonwealth law  How is income exempt? o Entity is exempt (Div 50)  Charities  Educational institutions  Scientific & religious institutions etc o Type of income is specifically exempt (Div’s 51 & 52)  d51 Certain types of income are exempt from income tax  e.g. income derived whilst being a part-time member of the Army or Navy Reserve Forces (s 51-5)  d52 Social security payments (e.g. some Centrelink payments)  Majority exempt: (see para 10-195 Master Tax Guide)  e.g. carer allowance, mobility allowance, seniors supplement etc Page 3 of 98 AYB219 – Taxation Law and Practice Notes Examples Constitution a) Can a Commonwealth bill that imposes a tax on plastic bags be enacted (as law) if the same bill also seeks to introduce a $1,000 note as a new denomination of currency? Briefly explain why/why not. No b) Can a Commonwealth bill that only imposes a tax on plastic bags be enacted (as law) if the tax is only to be imposed on those bags sold in Queensland? No Assessable Income Determine whether the following amounts constitute income according to ordinary concepts: 1) A lump sum of $25,000 awarded as damages to Simon by Guardian Insurance. The money was paid to him under an income protection policy as he was unable to work for 10 weeks due to breaking his leg. Yes, as it replaces a revenue loss 2) Paul receives a payment of $4 per pizza from his employer, Beagle Boys Pizza when he delivers a pizza. He also occasionally receives tips from customers when the pizzas are delivered Yes, as it is a proceed of personal exertion (both the tip and payment) MCQ Which of the following statements is correct? a) Exempt income is included in assessable income b) Only ordinary income can be exempt income c) Ordinary income includes income from personal exertion, income from property & income from business d) A capital gain derived under the capital gains tax provisions is an example of ordinary income Exempt Income Which of the following is NOT considered exempt income? a) A double orphan pension received from Centrelink b) An apprenticeship wage top-up payment received c) A mobility allowance paid under the Social Security Act 1991 d) An allowance paid to a member of the Defence Force e) All of the above amounts would be considered exempt income Page 4 of 98 AYB219 – Taxation Law and Practice Notes Week 1 Summary Page 5 of 98 AYB219 – Taxation Law and Practice Notes Lecture 2 – Income 1 Compensation and Gifts  Income from personal exertion o Reward to taxpayer as a result of their exertion/services o All personal exertion income = ordinary income (s6-5)  May also be statutory income:  “Your assessable income includes the value to you of all allowances, gratuities (tips), compensations, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly, to any employment of or services rendered by you”. s 15-2 ITAA 1997 o Allowances vs. reimbursements  Allowance: Upfront payment for a predetermined amount  Cover an estimated expense o e.g. travel or uniform allowance o Assessable: s 15-2  Reimbursement: Employee compensated exactly for all / part of an expense already incurred  Not assessable or deductible  Exception: reimbursed for car expenses using cents per kilometer method (s 15-70) o Compensation (insurance)  Loss of wages  e.g. income protection policies  Assessable: ordinary income o FCT v Inkster 89 ATC 5142  Personal injury  e.g. loss of limb, eye etc  Not assessable  Gifts vs. Income o A gift is not assessable o The most important question to ask is: why was the payment made  If it was connected to services provided then it’s assessable  If it was because of personal qualities then it’s not assessable o Important cases  Midland Railway Co v Sharpe (1904) AC 349 at 351:  “As long as the receipt accrues by virtue of the taxpayers office, it constitutes income.”  Hayes v FCT (1956) 96 CLR 47  1939 - 1950, Mr Hayes acted as Mr Richardson’s full-time accountant & financial advisor. He was adequately remunerated for this work  Mr Richardson’s business prospered & in 1950 became a public company  Later that year, Mr Richardson made several large cash gifts to various public bodies & gifts of shares in his public company to his two sons & certain other persons, including Mr Hayes, who was given 12,000 shares in the company  Over the years, Hayes had become close friends of Richardson & his wife often exchanging social visits Page 6 of 98 AYB219 – Taxation Law and Practice Notes  High Court held: transfer of shares = gift; stated: "In this case, it was not sufficient that the gift of shares had been motivated to some extent by the taxpayer's past services. Richardson had also been motivated by a general feeling of goodwill arising from a close relationship, which had both a business aspect and a personal aspect.  What is decisive is the fact that it is impossible to relate the receipt of shares by Hayes to any income producing activity on his part. Hence, the shares were no more than a gift from a grateful friend." o Considerations when making the distinction  Relationship between the parties  e.g. personal friends? known each other long?  Motive of donor  Thank you for services rendered or thank you for being a close/good friend?  Something given in return?  Person receiving the gift owed money for outstanding fees?  Expected or unexpected?  Customary in this industry?  Re-occurring & regular?  Time of the year gift was given?  Income of sportspersons o Does the sportspersons earn income from their sport?  Payments & prizes assessable  Commercial exploitation of their skills  Unless pastime or hobby o Taxation Ruling TR 1999/17 o Income includes: prize money, sponsorship & appearance fees  FCT v Stone (2005) 222 CLR 289  Windfall gains and prizes o e.g. lottery winnings, betting / gambling wins  Generally not assessable  Unless carrying on a business of betting/gambling o Doesn’t display usual characteristics of ordinary income  Unexpected, isolated, lump sum payment etc o Lacks connection with income producing activity o Taxation Ruling IT 167: TV or radio  Prizes won for the first time: not assessable  Regular appearances or invited back  Income: assessable o Exploiting skill or expertise o = Ordinary income Page 7 of 98 AYB219 – Taxation Law and Practice Notes Business Income  Determining the existence of a business o Important because:  Business income is assessable (s6-5), Hobby income is not assessable  Deduction for expenses necessarily incurred in carrying on a business (s8-1)  Taxpayers carrying on a business must adjust for trading stock (division 70)  What constitutes carrying on a business? o No “black & white” determinations (e.g. $ or period of time) o Courts have established the characteristics of a business  Repetition of acts & transactions  Frequency and duration of taxpayers activities o Repetitive and sustained conduct indicated business  Ferguson v FCT 79 ACT 4261  Single transaction can constitute a business o Provided a commercial character exists  Evans v FCT 89 ATC 4540  FCT v St Hubert’s Island Pty Ltd (1978) 138 CLR 210  Commercial nature of the activities  Systematically & Regularly (Hyde v Sullivan (1956) 73 NSW 25)  Trade on the open market on normal terms and conditions o Not just use products themselves or sell to friends/family  Rutledge v IRC (1929) 14 TC 490  Size and scale of the activities  Smaller scale less likely to be a business & visa versa o FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355  While volume & size relevant → not determinative o May be a small business but still a business  FCT v Walker 85 ATC 179  Existence of a profit motive  Courts: existence of a profit motive very important o Intention to make a profit  Does not actually have to make a profit  Businesses: undertaken with a view to making profit  Activities with little prospect of commercial success more likely = hobby  Whether the activity is conducted in a continuous & systematic manner  Emphasis on commerciality / business-like nature of activities o Businesses: conducted in organised & systematic manner  Do you keep accounts? o Hobbies: usually little/no commercial characteristics o The ATO has determined some questions that would identify a business  Do you have a business plan?, Specialised knowledge or skills, which you use?, Have you had prior experience in this area?, How much capital have you invested?, Have you done market research?, How much time do you spend on the activity?, Activity part-time or side-line or your main income earning activity?, Do you give quotes and supply invoices or tax invoices?, Have you obtained an ABN or registered for GST?, Have you registered a business name & opened a bank account?, Do you have printed letterhead, business cards & a web page?, Do you advertise? Page 8 of 98 AYB219 – Taxation Law and Practice Notes  Realisation of Capital Assets o Not every receipt received by a business is “income according to ordinary concepts” o Sale of assets incidental to business activities may be treated as capital  e.g. Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188 o Principles  Profit derived from sale of capital asset is not income according to ordinary concepts if:  Sale is outside business’ ordinary operations  Minimal efforts made to dispose of property  But will be if:  Realisation of income becomes so significant it amounts to a carrying on a business in its own right Investment Income  Interest Income o Interest income is ordinary income (s6-5 ITAA 1997) o Interest derived by a resident from all sources must be declared to the ATO  When received or credited (cash basis) o ATO: data matches information  Dividend income o “Dividend” defined:  Any profit distribution made by a company to its shareholders  Whether in money or other property (e.g. shares)  s 6(1) ITAA 1936 o Resident taxpayers: declare all dividends paid from any source o Non-resident taxpayers: Aus source  s 44(1) ITAA 1936 o Previously, double taxation on dividends  Dividend imputation system introduced 1 July 1987  Credit for income tax paid by company to the shareholders o “franking credit” or “imputation credit” o Removed double taxation on dividends o Example In November 2011, Simone, an Australian resident receives a $70 cash dividend plus franking credits of $30 attached from Silver Ltd. Assume Simone has a marginal tax rate of 30%. Calculate Simone’s income tax to pay for the 2012 income year Page 9 of 98 AYB219 – Taxation Law and Practice Notes o Types of dividends  Unfranked dividend  Company chosen not to attach franking credits  Shareholders: declare amount of unfranked dividend (cash) received in ITR  Effectively double taxed o No franking credit available to offset dividend income  Franked dividend  Company chosen to attach franking credits to dividend o Franking percentage: 1% - 100%  Shareholders: o Receive a credit for company tax paid o Declare amount of dividend received (cash) plus amount of franking credit in ITR (s 207-20)  Company paying dividends must provide shareholders with a distribution statement o Calculating amount of franking credit  Distribution statement may only provide franking %  Shareholder:  Entitled to credit for amount of franking credit (s207-20)  Franking credit exceeds net tax payable? o Excess is refundable  Rental Income o Ordinary income: s 6-5 ITAA 1997 o Rental income earned by co-owners of a property  Shared according to their legal interests  E.g. 40/60 legal split = 40/60 income/expenses split Trading Stock  Why is it important? o Sales of trading stock = ordinary income  s6-5 ITAA 1997 o Deduction allowed for cost of purchasing trading stock  s8-1 ITAA 1997 o Taxpayers carrying on a business must adjust for trading stock  Movement between opening & closing stock (statutory)  Defined in s70-10 ITAA 1997 as including: o Anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business & o Livestock o Inventory = goods held with the intention of sale o Goods acquired for the purpose of hire to customers Page 10 of 98 AYB219 – Taxation Law and Practice Notes  Meaning of stock on hand o Inventory “on hand” if you have legal power to dispose of it  Depends on terms of shipping not physical possession  FOB shipping & FOB destination  “free on board” or “freight on board” o FOB shipping point: legal title to goods passes to the buyer at the point of shipping o FOB destination: legal title to goods remains with seller until goods are received by buyer at destination  Valuation of trading stock: taxation o s70-45(1): each item of trading stock on hand at end of IY can be valued at either:  Cost  Market selling value  Replacement o Different basis may be adopted for each class of stock & each individual item of stock  Obsolescence o Value of trading stock falls due to obsolesce / other circumstances  E.g. discontinued product line  May elect to value trading stock at its obsolete value  s 70-50 ITAA 1997  Taxation ruling TR 93/23 provides guidelines in these circumstances  Disposal of stock o Stock given to others  E.g. donations, gifts to friends/family members etc  Taxpayer must include in the AI market value of stock on date of disposal (s70-90) o Stock taken by owner for personal use  Taxpayer must include in their AI cost price of stock on date of disposal (s70-90)  Small business entities & trading stock o Special trading stock rules apply to small business entities (SBE) o A business is classified as a SBE if:  It carried on business in that year; and  Its aggregated turnover for the year is < than $2 million  s328-110 ITAA 1997 o Where difference between the value of opening & closing stock is less than $5,000  Determined by a reasonable estimate  SBE does not have to:  Value each item of trading stock on hand at year end  Account for any change in value of trading stock  Closing value same as opening value for the year Page 11 of 98 AYB219 – Taxation Law and Practice Notes Lecture 3 – Income 2  Assessable income is divided into ordinary income (income under ordinary concepts) and statutory income (statute classifies it as income)  Assessable income is affected by: o Residency – where earned o Source – where from o Derivation – when Residency  Taxation of residents o s 6-5(2) & 6-5(3): main assessing provisions dealing with ordinary income o s 6-5(2) states:  “if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources whether in or out of Australia during the income year  Taxation of non-residents o s 6-5(3) states:  If you are a foreign resident, your assessable income includes:  The ordinary income you derived directly or indirectly from all Australian sources during the income year;  Other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source  Residents: taxed on all income / Non-residents: only taxed on Australian income  Who is a resident for taxation purposes? o Resides test  Reside means to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live, in or at, a particular place (dictionary)  There is not much difficulty in defining the residence of an individual, it is where he sleeps, lives and eats (Cesena Sulphur Co Ltd v Nicholson (1876) LR 1 Ex D 428)  Court’s interpretation of “resides” in Australia depends on:  Length of their physical presence  Family, employment or business ties  Maintenance of a home or place of abode  Frequency, regularity & duration of visits  Habits & mode of life (ie. day-to-day behaviour whilst in Aus)  Business & social relations  Resides test: commissioner’s 4 factors  TR 98/17 o Applies to individuals entering Aus o Length of time spent in Aus not decisive  Critical question: o Whether individual’s day-to-day behaviour in Aus is consistent with someone residing in Aus  Similar continuity, routine or habit  Emphasis on 4 factors Page 12 of 98 AYB219 – Taxation Law and Practice Notes  (a) Intention or purpose of presence o “Why is the individual here?” o Settled purpose may support an intention to reside in Aus  E.g. long-term employment, enrolling in Bachelor/ Masters degree  Traveller/visitor doing casual work to supplement income?  (b) Family & business / employment ties o Individual bring their family to Aus with them?  More likely to be considered Aus resident  (Peel v The Commissioners of Inland Revenue (1927) 13 TC 443)  (c) Maintenance & location of assets o Occupation of a dwelling in Aus? o Owns, rents or leases accommodation for a significant period of time? o Other assets here? (e.g. cars, furniture, bank accounts?)  More likely to be Aus resident o What about assets located overseas?  Doesn’t affect Aus tax – i.e. doesn’t matter if you have a home overseas  (d) Social and living arrangements o May also indicate Aus resident e.g.  Joining sporting or community organisations  Enrolling children in school  Redirecting mail to Aus  Committing to a residential lease  Resides test summary  Does an individual reside in Aus? o Intention o Family & business / employment ties o Assets o Social & living o Length of time  Commissioner: individual an Aus resident if: o Physically present in Aus for at least 6 months and  6 months test is only applicable if all other tests are inconclusive – based on intentions not actuals o Behaviour consistent with an Aus resident Page 13 of 98 AYB219 – Taxation Law and Practice Notes o Domicile test  Domicile = legal concept, defined as:  “The intention that a person has to make his home indefinitely in that country.”  s 10, Domicile Act (1982)  An Aus domiciled person = deemed Aus resident:  Unless individual has a permanent place of abode (PPOA) outside Aus  A person will retain Aus domicile if they:  Travel overseas temporarily  Do not intend to permanently set up home in another country  Intend returning to Aus within a definite period  To be regarded as a non-resident:  Must prove they changed domicile to another country  i.e. have a “PPOA outside Aus” o A person establishing a residence or home outside Aus o “Permanent” ≠ everlasting but more than temporary o Practically = having a fixed address outside Aus  FCT v Applegate 79 ATC 4307  Background o Taxpayer was an Aus solicitor o Transferred to Vila in Vanuatu to set up a branch of his firm o Taxpayer’s wife & children accompanied him o Transferred for indefinite time o Intended to return to Australia eventually o Taxpayer left no assets in Aus & gave up lease on his house o In Vila, taxpayer leased premises, obtained resident status & was admitted to practice o Taxpayer returned to Aus after 21 months due to ill health  Commissioner treated taxpayer as Aus resident o i.e. taxpayer had retained his Aus domicile on basis he intended to return to Aus o Had not established a PPOA outside Aus  Court disagreed, held: taxpayer was not an Aus resident o Had established a PPOA in Vila o Abandoned home in Aus o Intention of saying in Vila an indefinite & substantial period  August 1991, Commissioner issued IT 2650  Applies to domicile test  In particular for residents departing Australia  6 factors Commissioner will consider if taxpayer has a PPOA outside Australia o Intended & actual length of taxpayer's stay o Whether taxpayer intended to return at some definite point in time o Whether taxpayer has established a home outside Aus (fixed address) o Whether place of abode exists in Aus or has been abandoned because of the overseas absence o Duration & continuity taxpayer's presence in the overseas country o Durability of association that they have with Aus Page 14 of 98 AYB219 – Taxation Law and Practice Notes  Iyengar & FCT (2011) AATA 856  Taxpayer spent 2 years 7 months working in Qatar  Lived in a serviced apartment  Did not buy/lease any assets  Paid in Aus $; mostly sent back to Aus  Wife & children remained in Aus  Tribunal: still Aus resident: retained Aus domicile o Didn’t establish PPOA outside of Australia o “Temporary”  Domicile test guidelines  Taxpayer leaves Aus for 2+ years (or intends to) and  Establishes a home in another country or  Only a vague possibility of returning to Australia o Taxpayer has a PPOA outside Australia o i.e. domicile test not met  Taxpayer leaves Aus with definite intention of returning within 2 years o Normally remain an Aus resident o Unless established a PPOA outside Aus o 183 days test  Deemed Aus resident if physically present in Aus for > 183 days in an income year  However, only applies where taxpayer:  Does not have a usual place of abode outside Aus and  Has the intention to take up residence in Aus  IT 2681:  Presence in Aus does not need to be continuous  Time starts when person arrives in Aus  Based on income year o Superannuation fund test  Active contributing member (or immediate family member is) of a Commonwealth superannuation scheme  Deemed to be an Aus resident  Relevant to Commonwealth Government employees located in an overseas country  e.g. Australian embassy employees in a foreign country Page 15 of 98 AYB219 – Taxation Law and Practice Notes (Residency Test Summary) Derivation of Income: timing  “When has the income been derived? o Determines income year amount will be assessed in  2 methods: o Cash basis (receipts)  When does the taxpayer received cash? o Accrual basis (accruals)  Treated as income when taxpayer accrues the right to receive income  e.g. when goods are delivered / services performed  Which basis to use?  Dependent upon the type of income derived  Not the taxpayer o 5 types of income  Income from personal exertion o I.e. manual labour – building o Deemed to be derived when received  I.e. cash basis  Whether payment for past or current services  Brent v FCT71 ATC 4195 Page 16 of 98 AYB219 – Taxation Law and Practice Notes  Trading (business income) o Income from carrying on a business must be on accruals basis  i.e. income recognised when earned not when cash is received  Henderson v FCT (1970) 119 CLR 612 o Exception: income from lay-by-sales  Derived when buyer pays final instalment & goods delivered  Revenue received in advance o Payment received upfront for goods / services yet to be provided  Consider accounting & tax implications o e.g. Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 o Tax implications  High Court: payments received up-front were not income  Receipts assessable in income year when dance lessons provided  Accruals basis was appropriate  On basis refunds were given  If deposit refunds are not given = cash basis (TR 95/7)  Income from professional practices o Accounting basis depends on several factors  Most important: size of professional practice o Smaller professional practices:  Income earning more like personal services income?  Cash basis appropriate  FCT v Firstenberg 76 ATC 4141 o Larger professional practices  Accruals basis appropriate if:  Income earning constitutes carrying on a business  More like trading income  Large scale of operations o e.g. Henderson v FCT (1970) 119 CLR 612  Commissioner: borderline cases = accruals basis generally appropriate  Income from property o Interest, dividends & rent  Cash basis o Exceptions: taxpayer carrying on a business of money lending (e.g. banks) or landlord  Accruals basis appropriate  Summary of derivation rules Type of income Derivation rule Income from personal exertion Cash Trading (business) income Accruals Accruals (where refunds Revenue received in advance given), Cash (no refunds) Income from professional practices Cash (small) Accruals (large) Cash (individual) Income from property Accruals (main business) Page 17 of 98 AYB219 – Taxation Law and Practice Notes Source: where  Source is a question of “where?” o “Where has the income been derived?”  Geographical location at which the act, transaction or event that produces the income occurs  Link between source & residency o Issue is only relevant for non-residents  Course: type of income o Source of income depends upon the type of income derived, not the taxpayer o Income can be classified as:  Income from personal services  Trading (business) income  Interest  Dividends  Rent  Royalties  Income from personal services o Source of salary, wages, professional services income etc. may be:  (i) Place where the contract was entered into  (ii) Place where the work is performed  (iii) Location of payment o Courts held: source is determined based on the most important factor in each case o French v FCT (1957) 98 CLR 398  Taxpayer (Aus resident); employed as an engineer in Aus  Taxpayer spent 2 to 3 weeks a year in NZ acting as an inspecting engineer for his employer  His salary was paid into his Sydney bank account as usual  Taxpayer argued income earned whilst in NZ was sourced outside Aus & therefore should be exempt (old section)  Court found the source was the place where the work was performed (NZ)  As the services which gave rise to the remuneration were carried out in NZ o FCT v Mitchum (1965) 113 CLR 401  Taxpayer, an actor, was a USA resident  He contracted with a Swiss company to be paid $50,000 to act in 2 films  Entitled to payment even if his services were not utilised  Film was produced largely in Aus  Taxpayer was sent to Aus for 11 weeks to act & provide consultancy services  Payment was made in the USA  Court: most important factor: where contract was signed Page 18 of 98 AYB219 – Taxation Law and Practice Notes o Personal services general rule  Normal contract of employment/for services?  Source = where work is undertaken  Creative powers/special knowledge involved?  Where the work undertaken may be relatively unimportant  Source? Where contract/payment made?  e.g. an author writing a book o On a certain subject? o On a particular country? o Income from property  (a) Interest  Location of bank account where money deposited or  Place loan contract is made  Spotless Services Ltd v FCT 95 ATC 4775  (b) Dividends  Where company paying the dividends made its profits  Esquire Nominees Ltd v FCT 72 ATC 4076  (c) Rent  Country where the property is located  (d) Royalties  Right to use intellectual property (IP) o e.g. copyright, patents, trademarks, designs, licenses etc o Source: country where IP is located & registered  Source summary Type of Income Source Rule Income from personal services Where work performed Trading (business) income Place of business profits Interest Bank a/c located Dividends Place of business profits Rent Place of rental property Royalties Where IP registered Page 19 of 98 AYB219 – Taxation Law and Practice Notes Week 3 Summary Page 20 of 98 AYB219 – Taxation Law and Practice Notes Examples Michelle is a doctor who comes to Australia from France to conduct medical research for five months. She actually stays for seven months to complete the Australian phase of her research project. Michelle's husband and children do not accompany her to Australia. They stay in their home in Paris. From Australia, she assists her husband in running the family business. While in Australia, Michelle stays in a hotel. She uses credit cards to meet day-to-day expenses that are reimbursed by her employer. Her concentration on her research is often interrupted because she has to constantly fax and phone her husband about their emerging business problems. In fact, she occasionally makes a quick trip home for a week to Paris to sort out business dilemma’s.  Michelle is likely a non-resident under the resides test o There was no intention for a long term stay o There is no family or permanent employment ties o Assets are located overseas o Social and living arrangements are that of a non-resident o The length of time was intended to be short Mohammad is a student from India who comes to Australia to study a 4-year bachelor degree in civil engineering. Mohammad lives in rental accommodation near the university with fellow students and works part-time at the university social club as a barman. Soon after arriving, he receives a call from his mother informing him that his father is seriously ill. After five months, Mohammad withdraws from his studies and permanently returns home to India.  Mohammad is likely a resident under the resides test o There was an intention for a long term stay o Assets are located in Australia o Social and living arrangements are that of a resident o The length of time was intended to be long Page 21 of 98 AYB219 – Taxation Law and Practice Notes Lecture 4 – General Deductions Deductions under s8-1  s8-1(1): You can deduct from your assessable income any loss or outgoing to the extent that: o (a) It is incurred in gaining or producing your assessable income, or o (b) It is necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income  Hence there are considered to be two positive ‘limbs’  s8-1(2): No deduction is allowed under s8-1(1) to the extend that: o (a) It is a loss or outgoing of capital, or of a capital nature o (b) It is a loss or outgoing of a private or domestic nature o (c) It is incurred in relation to the gaining or producing your exempt income, or o (d) A provision of this Act prevents you from deducting it  Hence there are considered to be four negative ‘limbs’ First Positive Limb s8-1(1a) “You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income” Page 22 of 98 AYB219 – Taxation Law and Practice Notes  When is a loss or outgoing “incurred?” o “Incurred:” not defined in either ITAA 1936 or 1997 o Courts: expenditure is incurred if it is:  Definitively committed to (existing obligation) &  Capable of reasonable estimation (quantifiable) o Courts have held that incurred does not mean the same as paid  Does a loss or outgoing have to be exactly quantified? o CIR v Mitsubishi Motors New Zealand Limited (1995) 17 NZTC 12,351 o Taxpayer assembled motor vehicles & sold them to dealers o Based on previous experience, taxpayer estimated:  63% of all vehicles sold in 1998 contained defects covered by warranty  Total cost of all repair work for those vehicles o Taxpayer offset these costs against income from vehicles sold o Court: followed RACV Insurance v FCT 74 ATC 4169  Confirms incurred ≠ paid: para 6(a):  "A loss or outgoing may be incurred within s 8-1 even though it remains unpaid (at year-end), provided the taxpayer is 'completely subjected' to the loss or outgoing"  Expenses incurred before business starts o “Preparatory” acts  Incurred before business activity undertaken  Not deductible under s 8-1: incurred “too soon”  Deductible under s 40-880? o When does a business start?  “current operations” begin o Softwood Pulp & Paper Ltd v FCT 76 ATC 4439 o Goodman Fielder Wattie Ltd v FCT 91 ATC 4438  Expenses incurred in closing down a business o E.g. payments to receivers, liquidators, ASIC in deregistering a company etc. o Generally non-deductible under s8-1  Taxpayer is no longer carrying on a business  Expenditure incurred “too late” o Peyton v FCT (1963) 109 CLR 315  Expenditure incurred after business has ceased operations o Entity may incur day-to-day business expenses after business has ceased trading  Generally non-deductible: not deriving any AI  Placer Pacific Management Pty Ltd v FCT 95 ATC 4459  FCT v Jones (2002) ATC 4135 o May be deductible provided expenditure deductible if business was still trading Page 23 of 98 AYB219 – Taxation Law and Practice Notes  s40-880 Blackhole expenditure o Business-related capital expenditure not deductible elsewhere  Deductible under s 40-880 ITAA 1997  Section of last resort o Expenses deductible over a 5 year period  20% deduction each year  Expenditure not apportioned if incurred part way through IY Second Positive Limb s8-1(1b) “You can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.”  Meaning of “necessarily incurred” o Courts: outgoing appropriate to taxpayer’s business o ≠ absolutely essential or necessary o Some connection with taxpayers business/income earning process  e.g. head office expenses, entertainment etc  Magna Alloys & Research Pty Ltd v FCT 80 ATC 4542 o “For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred. o It is no part of the function of the Act or those who administer it to dictate to taxpayers in what business they shall engage or how to run the business profitably or economically.” First Negative Limb s8-1(2a) “It is a loss or outgoing of capital, or of a capital nature”  Expenses of a capital nature  Accounting: o Expense: P&L – generally deductible for tax o Acquisition of asset: capital – balance sheet  Tax: o “Income” & “Capital” not defined o Courts: 3 tests to distinguish  Once & for all test  Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529:  “…capital expenditure is something that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year”  General rule, not definitive in every case  Enduring benefit test  British Insulated & Helsby Cables Ltd v Atherton (1926) A.C. 205  “When expenditure is made…with a view to bringing into existence an asset or an advantage for the enduring benefit, I think that there is very good reason for treating such an expenditure as properly attributable…to capital”  What does the payment represent? Or what is it for? Page 24 of 98 AYB219 – Taxation Law and Practice Notes  Business entity text -> generally most important  Incurred to create / enhance profit-yielding structure: generally capital  Question o Incurred to restore the profit-yielding structure? Or o Protect/defend day-to-day business operations?  Generally deductible  Sun Newspapers Ltd & Associated Newspapers Ltd v FCT (1938) 61 CLR 337 o Held expenditure not deductible because: o (i) Lump sum payment incurred to remove competition o (ii) Made to enlarge taxpayer's organisation o (iii) Consequences, e.g. loss in circulation, were of a lasting character o (iv) Transaction involved purchase of a capital asset, i.e. printing equipment  Legal fees: capital or deductible? o Use previous tests, i.e.:  Incurred to enlarge, preserve, protect or defend profit yielding structure = capital  Existence of the business is threatened = capital  Incurred to protect / defend day-to-day business operations = deductible under s 8-1 Second Negative Limb s8-1(2b) “It is a loss or outgoing of a private or domestic nature”  Expenditure directly related to income earning activity? o Consider: clothing, food, home-office expenses  “Essentially” private or domestic nature o No deduction allowed  FCT v Cooper 91 ATC 4396 o Food consumed not deductible  Clothing o Clothing classified into 5 categories: (a) Conventional, (b) Compulsory uniforms, (c) Non- compulsory uniforms, (d) Occupation specific, (e) Protective o Tax deductibility: Division 34 ITAA 1997 o Day-to-day clothing = private expense  Non-deductible under s 8-1 o Employer requires taxpayer to dress in a particular way?  Suits for lawyers/accountants, sports clothes by sports teachers etc?  Still ‘conventional clothing’ as can be worn outside of work  Limited exceptions to rule: TR 97/12 o Non-conventional clothing which employee required to wear = deductible o Non-compulsory uniforms: not deductible  Unless uniform design entered on Register of Approved Occupational Clothing at time expense incurred (s 34-25 ITAA 1997)  Uniform must have a sufficiently distinctive look & an obvious identity Page 25 of 98 AYB219 – Taxation Law and Practice Notes o Occupation specific clothing  Deduction generally allowed  Provided not conventional clothing  E.g. nurse’s traditional uniform, chef’s hat, barrister’s wig o s 34-20(1) ITAA 1997 o Protective clothing  Protective clothing & safety footwear = deductible  Provided use relates to income earning activity  Clothing worn to protect taxpayer from personal injury, disease or death  Protect taxpayers everyday clothing from damage  Laundry and dry cleaning o Costs of laundry and dry cleaning follow clothing treatment o Amount claimed < $150  No need to keep records  Commissioner will accept estimate: TR 98/5  Hairdressing & Grooming expenses o Non-deductible: private expense o Taxpayer required to maintain high standard of appearance?  TR 69/18 o Performing artist  May be deductible if required for particular role  Home-office expenses o Carried on business or employment activities at home?  May be entitles to home-related deductions o TR 93/30: is the home a:  Place of business? Or  A convenient place to work Page 26 of 98 AYB219 – Taxation Law and Practice Notes o Deductions may be available for:  Interest on home, rent, insurance, council & water rates**  Heating & lighting  Depreciation, insurance, repairs & maintenance for relevant equipment & furniture relating to business  Repairs & maintenance to home**  Cleaning calculated on floor space area  Telephone costs  ** Only available for place of business o Deduction is apportioned between business & private use  E.g. floor space  Floor area of business / total floor area of house * relevant expenditure  Para 16-480 2012 CCH Australian Master Tax Guide o Claiming home office expenses  Actual expenses vs. 34 cents per hour: TR 93/30  Heating/cooling & lighting  Difference between what actually paid & what would have paid if not worked from home  Depreciation: items used in income-producing activities  34 cents per hour: record amount of time working from home over 4-week period Third Negative Limb s8-1(2c) “It is incurred in relation to the gaining or producing your exempt income”  Deduction not allowed o Not deriving any assessable income o E.g. expenditure incurred by a taxpayer doing voluntary work for a charity  TD 93/185 Fourth Negative Limb s8-1(2d) “A provision of this Act prevents you from deducting it”  E.g. deduction under s 8-1(1) specifically denied for: o Fines & penalties for breaching the law (s 26-5) o HECS & HELP payments (s 26-20) o Recreational club fees (s 26-45) o Leisure facilities (s 26-50) o Bribes paid to public officials (ss 26-52 & 26-53) o Most entertainment (subdivision 32-B) o The first $250 of self-education expenses (s 82A) o Employee’s car parking expenses (s 51AGA) Page 27 of 98 AYB219 – Taxation Law and Practice Notes Page 28 of 98 AYB219 – Taxation Law and Practice Notes Summary Page 29 of 98 AYB219 – Taxation Law and Practice Notes Examples Rachel is a sales consultant with a telemarketing company. She uses her mobile telephone, to make work- related telephone calls. Her mobile phone bill for the month of June 2012 was $100. Based on a breakdown of these calls, Rachel reliably estimates that she used the phone 75% for business and 25% for private purposes What amount is deductible to Rachel under s 8-1?  $75 is deductible is it fits 8-1(1a), but the remaining $25 is excluded under 8-1(2b) Ned, an Australian resident individual taxpayer, receives his Telstra telephone bill (for $290) for the month of June on 16 June 2012. Ned pays his telephone bill on 2 July 2012. Ned used the telephone 100% for work- related purposes When has Ned incurred the telephone expense? 2012 income year or 2013 income year?  The 2012 income year as it is a quantifiable, existing obligation for the 2012 income year Jim operates a renovation business. Jim is contracted to renovate Suzie’s kitchen for $5,000. Jim finishes this work on 12 August 2011 & is fully paid for this work on that date. At Christmas, Jim gives Suzie a bottle of champagne as a gift. Jim expects the gift will either generate future business from Suzie or motivate her to refer Jim’s services to others Is Jim able to deduct the cost of the champagne under s 8-1?  Yes, it is an entertainment expense that has some connection to the taxpayer’s business An engineering consulting firm “Eng Co” employed James. One of the terms of his employment agreement was that if James left Eng Co & took clients with him, he would reimburse Eng Co. James resigned from Eng Co & some clients followed James into his new business. Eng Co sued for breach of contract. James incurred $8,500 in legal expenses regarding the legal action, which eventually resulted in an out of court settlement. The out of court payment settled in full any claims made by Eng Co in relation to the clients, so that James was able to continue his new business. Is James able to deduct his legal costs under s 8-1?  No – as it is capital expenditure  It brought into existence an asset or an advantage for enduring benefit Page 30 of 98 AYB219 – Taxation Law and Practice Notes Jessica builds & markets houses in Brisbane. Following allegations of improper business tactics, a Royal Commission was established to investigate her activities. The Royal Commission proceedings are unlikely to threaten the existence of the business itself. However, the proceedings are likely to cause embarrassment to Jessica and a decline in her future business. Jessica incurred $50,000 of legal expenses & another $20,000 in public advertising to counter the allegations made Can Jessica deduct these costs under s 8-1?  No, as it wasn’t to protect day-to-day operations Galvin owns a successful cocktail bar & restaurant. Sam applies for a liquor license to open a cocktail bar near Galvin’s business. Galvin opposes the license & incurs legal fees of $3,500 Is the cost of the legal fees deductible to Galvin under s 8-1?  No, as it is incurred to protect/defend Greg, a pharmacist, is sued due to reckless dispensing of certain drugs. The maximum penalty that can be imposed is a fine of $5,000. Greg cannot be suspended or deregistered if found guilty. Greg incurs legal fees of $2,000 in defending these charges Is the cost of the legal fees deductible to Greg under s 8-1?  Yes, as it is to defend day-to-day business operations Kirstin works as bank teller from 9-5pm, 5 days a week. 2 days a week she also work at a liquor store from 6-9pm. Before starting work at the liquor store, Kirstin buys an evening meal for $15 Is the cost of the meal deductible to Kirstin under s 8-1?  No, as it is essentially of domestic nature Mel is a marriage celebrant who purchases dress suits, accessories, shoes & stockings for her work. She does not wear these items when she is not working. The items are far more extensive than she would ordinarily acquire. During the 2012 income year Mel spends $2,820 on clothing to wear when acting as a marriage celebrant Would Mel be able to claim a deduction for the clothing costing $2,820 under s 8-1?  No, as it is still conventional clothing that can be worn outside of work Page 31 of 98 AYB219 – Taxation Law and Practice Notes Evelyn is a lawyer. Evelyn works from home in her study approx. 20 hours per week (out of approx. 80 hours per week), 45 weeks of the year. The study is principally used for her work, though is occasionally used for personal reasons. Based on the house’s floor plans, the study consists of 16% of the house’s floor area. Evelyn asks you whether she can claim a deduction for a portion (16%) of interest on her mortgage, rates & insurance premiums (totaling $10,000), and if so, how much?  No, as it is not the only place available for business (as required for interest repayments) Page 32 of 98 AYB219 – Taxation Law and Practice Notes Lecture 5 – Allowable Specific Provisions General and Specific Deductions  s 8-5(1) ITAA 1997 states: o “You can also deduct from your assessable income an amount that a provision of the Act allows you to deduct.”  s 12-5 ITAA 1997 contains a summary of all the specific deductions available to taxpayers  Importance of deduction o The size of your tax deductions is directly related to your ability to know and tack all your expenses o To balance out inequalities o ATO’s focus for 2012-13  Defence Force  IT managers  Plumbers  Medical practitioners  Tax avoidance schemes  Data matching (dividends, interest, capital gains, foreign income)  “How can this expense be legitimately related to my income?” Repairs s25-10  s25-10 ITAA 1997: repairs deductible? Must: (i) Incur repair in income year (ii) Not be capital (iii) Be to premises, plant etc used for producing AI (iv) Not be an initial repair Page 33 of 98 AYB219 – Taxation Law and Practice Notes Borrowing Expenses s25-25  Expenses incurred in borrowing money: o Not interest o Transaction costs etc.  If money is used to produce AI; expenses are deductible over: o 5 Years or o Loan Term (or period of loan if repaid early)  Whatever is shorter  Calculation is done on a daily basis Car Expenses: Div 28 ITAA 1997  What is a car? o S995-1 ITAA 1997  Car expenses deductible under s8-1 ITAA 1997 if: o Own or lease car o Incurred in deriving AI or carrying on a business  Cost of travelling between home & work/business is not deductible o Lunney v FCT (1958) 100 CLR 478  4 Methods to claim car expenses: s28-15 o Cents per kilometer o 12% of original value o One-third of actual expenses o Logbook method  Choose any method for each car o Can change methods at end of IY (s28-20) o ATO: work related car expenses calculator can be helpful 1. Cents per km method o s28-25: claim maximum of 5,000 business kms  Number of business kms travelled during income year * rate per kms (cents) o Records: not required to maintain logbook / keep receipts  Justify how business kms estimated o Rate per km (cents) depends on car’s engine capacity Page 34 of 98 AYB219 – Taxation Law and Practice Notes 2. 12% of original value: s28-45 o Only use this method if:  Travelled > 5,000 business kms during IY  Or would have if car owned for full year o 12% of original cost of car * number of days owned in income year o Original cost = acquisition price / MV of car when leased  Limited to luxury car limit  $57,466 for 2012 IY 3. One-third actual expenses: s28-70 o Only use this method if:  Travelled > 5,000 business kms during IY  Or would have if car owned for full year o Calculation  One-third of actual expenses o Records: not required to maintain logbook / keep receipts 4. Logbook Method: s28-90 ITAA 1997 o Use this method regardless of number of kms travelled o Records: logbook detailing odometer readings for each trip undertaken for 12 consecutive weeks  Valid for 5 years if no change in pattern of use  Separate logbook for each car  Receipts of all car expenses must be kept o Business % * total car expenses incurred during IY Page 35 of 98 AYB219 – Taxation Law and Practice Notes Depreciating Assets: Div 40 ITAA 1997  s8-1(2): denied immediate deduction for any outgoing of a “capital nature”  Deduction for: decline in value o “Depreciating asset” o Holder (generally owner) o Used in the course of gaining or producing AI  Two methods to calculating the depreciation deduction  What is a depreciating asset? o Asset with limited effective life o Expected to decline in value  E.g. plant & machinery, computer equipment etc o Expenditure on capital works (e.g. buildings):  May qualify for capital works write-off: Division 43 o Cost: purchase price & incidental costs o Holder?  Determining an asset’s effective life o Decline in value based on asset’s effective life  Expressed in years o 2 choices:  Commissioner’s determination: TR 2011/2  Self-assess o Choice made when: asset first used or  Installed & ready for use (s 40-60) Page 36 of 98 AYB219 – Taxation Law and Practice Notes  Diminishing Value Method o Base value = cost – accumulated depreciation o Pro-rated on day count (max 366 days) o “Diminishing value rate”  200% if asset acquired on/after 10 May 2006  Otherwise 150%  Special rules for individual tax payers  Low Value Pool (LVP) o Once allocated to a LVP, asset must remain in LVP o No need for day count test if asset bought/sold Page 37 of 98 AYB219 – Taxation Law and Practice Notes  Depreciation rules for small business entities  Large business taxpayers  Computer software o Computer hardware (e.g. computers, screens etc.) depreciated using ordinary rules o Computer software: special deprecation rules  2 types:  Internally developed software o Optional: “software development pool”  Intended use: solely for producing assessable income o Depreciable using prime cost method:  0% in 1 year, 40% in 2 year, 40% in 3 year, 20% in 4 yearth Page 38 of 98 AYB219 – Taxation Law and Practice Notes  Purchased software (“in-house” software) o Software purchases “off the shelf” o Developed/commissioned software not allocated to software development pool o Depreciated over 4 years using prime cost method  I.e. 25%  Disposals of depreciated assets o “Balancing adjustment event” o Accounting term = gain / loss on sale  Comparison of accounting and tax terminology Page 39 of 98 AYB219 – Taxation Law and Practice Notes Deduction for Capital Works Expenditure  Available when capital works used to produce AI  Calculated on daily basis  Based on original construction cost o ATO will accept estimates TR 97/25  Rate depends on: o Year construction commenced and use of capital works  Division 43: “capital works”  What does construction expenditure include? o Construction costs o Preliminary expenses o Integral structural features o Does not include costs associated with:  Acquiring land  Clearing land  Demolishing existing structures  Pre-construction site clearance  Landscaping Page 40 of 98 AYB219 – Taxation Law and Practice Notes Substantiation of Work-Related Expenses  Required to substantiate: o Work, car & business travel expenses  Written evidence  Retained for minimum of 5 years  Not required for: o Employment related expenses if total claim < $300 o Laundry expenses < $150 o Travel & overtime meal claims if < allowance received o Car expenses using cents per km method Page 41 of 98 AYB219 – Taxation Law and Practice Notes Examples William purchases a house that appeared to be in good repair. To make it more attractive to prospective tenants, minor repairs & renovations are undertaken costing $3,200. During the course of these repairs & renovations, William discovers that the ravages of white ants seriously affect the woodwork. William incurs $27,000 to remedy the problems caused by the white ant infestation & to restore the property to a state in which it is suitable for occupation by tenants What deductions (if any) can William claim under s 25-10 ITAA 1997?  No as it is an initial repair Ken runs a manufacturing business in a building in which the wooden floor needs repairing. Ken’s options are either to repair the old floor or to replace it with an entirely new one of steel & concrete. Ken decides to adopt the second option because it will save future repairs & because it has distinct advantages over the old wooden floor Can Ken claim a deduction under s 25-10 ITAA 1997 for the replacement of the wooden floor?  No as it is a capital replacement cost On 17 January 2012, Mark incurred borrowing expenses totaling $8,240 with the Commonwealth Bank in arranging a $350,000 loan to finance the purchase of a rental property. Mark also incurred interest of $9,050 from 17 Jan - 30 June 2012. Property will be used exclusively for renting to tenants. Loan is for a term of 20 years What amount can Mark claim under s 25-25 ITAA 1997 in respect of the 2012 income year? Hint: from 17 Jan 2012 - 30 Jun 2012: 165 days  8240/(5*365)*165 = $745 On 22 February 2012, Debbie purchased a rental property for $450,000 & immediately rented it out. Debbie obtained a report from a quantity surveyor stating that the property was built in 2002 for an estimated construction cost of $300,000 What can Debbie claim as a capital works allowance for the 2012 income year? Hint: there are 129 day from 22 Feb 2012 to 30 Jun 2012  $300,000 * 2.5% * 129/365 = $2,651 Page 42 of 98 AYB219 – Taxation Law and Practice Notes Lecture 6 – Capital Gains Tax  s102-5 ITAA 1997 says specifically that a net capital gain is included in your assessable income  CGT introduced on 20 Sept 1985 o Parts 3-1 & 3-3 ITAA 1997  CGT is not a separate tax  CGT applies: o Disposal of capital asset acquired on or after 20 Sept 1985 (examples?) o Disposal not undertaken in ordinary course of business  Assessable: s 6-5 (examples?)  Examples of where CGT applies: o Property (but not the house you live in – it is exempt) o Shares  CGT only applies if you are not taxed under your normal taxable income conditions Page 43 of 98 AYB219 – Taxation Law and Practice Notes Process of CGT determination Page 44 of 98 AYB219 – Taxation Law and Practice Notes Step One: What is a CGT Event?  CGT Event A1: Disposal of a CGT asset o Disposal = change in legal & beneficial ownership o Event A1 occurs when:  (a) Contract signed (not settlement)  (b) If no contract: physical change of ownership  CGT Event C1: Loss or destruction of a CGT asset o CGT event C1 occurs when:  Taxpayer insured: first received compensation  Taxpayer not insured: destruction occurred  Can’t determine: loss is first discovered o Capital gain: capital proceeds received > cost base o Capital loss: capital proceeds received < cost base Page 45 of 98 AYB219 – Taxation Law and Practice Notes Step Two: What is a CGT Asset?  Post-CGT asset  S108-5(1) ITAA 1997: any kind of property o Examples? o How does CGT affect depreciating assets?  Classification: o Collectables  s 08-10(2):  (a) Paintings, sculptures, drawings, engravings, photographs, jewellery, an antique, coin or medallion;  (b) A rare portfolio, manuscript or book; or  (c) A postage stamp or a first day cover  that is used or kept mainly for the taxpayers personal use or enjoyment  Calculation of CG & CL from collectibles  Rule 1: collectable acquired for > $500: CGT applies  Rule 2: collectable acqu
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