Contents

Administration of the taxation system/Regulation of Practitioners....................................................... 2

INCOME FROM PERSONAL EXERTION/ORDINARY AND STATUTORY INCOME ....................................... 5
BUSINESS INCOME .................................................................................................................................. 7
Capital Gains Tax: Chapter 21. .............................................................................................................. 10
Fringe Benefit Tax & Goods & services tax: .......................................................................................... 15
Goods & Services Taxation: .............................................................................................................. 17
Deductions: Chapters 13, 17, 18, 19 ..................................................................................................... 20
Trading Stock: Chapter 20 ..................................................................................................................... 23
Company Taxation: Chapter 24 FTL .................................................................................................... 25
Business Enterprise Overview........................................................................................................... 25
Taxation of Company .................................................................................................................... 26
Establishment/Acquisition ................................................................................................................ 27
Operation: ......................................................................................................................................... 28
Liquidation/Disposal of interest. ....................................................................................................... 33
Partnerships & Trusts: Chapter 25 & 26 ............................................................................................... 33
Partnerships ....................................................................................................................................... 33
Trusts: ............................................................................................................................................... 35

Administration of the taxation system/Regulation of Practitioners

Taxable income Formula: (Page 203 FTL diagram)

1. For the financial year: s4-10 (3) ITAA97 (p. 92)
a. Income tax = (taxable income x tax rate) tax offsets.
2. For the income: s4-15 (1) ITAA97 (p.92)
a. Taxable income = Assessable income Deductions.
b. Note: assessable income is made up of ordinary income and statutory income.
c. Note: deductions are made up of general deductions and specific deductions.
Assessable income:
ORDINARY INCOME:
o Not defined by legislation but under common law understanding it is
salary/wages, ordinary business receipts, interest received on bank deposit or
rent derived from investment property.
o S6-5 ITAA97 (p.96)
STATUTORY INCOME:
o Definition of statutory income: S6-10 ITAA97 (p.97)
o Refers to amounts that are not ordinary income in nature but are nevertheless
assessable income. Can find a list of statutory incomes in section SS 10-5
ITAA97 (p.101)
NOT ASSESSABLE INCOME: s6-15 ITAA97 (p.98)
o 1) if an amount is not ordinary income, and is not statutpry income, it is not
assessable income.
2)exempt income is not assessable income
3)Non assessable non-exempt income is not assessable income.
EXEMPT INCOME 11-5 (entities that are exempt ) and 11-15 (personal income that
is exempt) ( p. 112- 113) ITAA97
o 11-5 examples: health benefit organisations, sports organisations, registered
charity etc
2

o 11-15 examples: Family assistance, school kids bonus, income from a scholarship,
defence force allowances, social security etc.
Characteristics of income/Arguments to prove something is income(not capital etc):
1. Income is derived from a source. That is work and employment is the source of
income or wages.
2. Gp international Pipecoaters Pty Ltd v FCT 90 ATC 4413P: Income will be clearly
revealed by Periodicity, Regularity, Recurrence, Scope of transaction and Reason by
which money is received (intention)
3. Gain Concept:
a. Gain is only realised once it crystallises: if you trade in shares only when you
sell your shares does your gain crystallise. Income must be some form of gain.
For example being lent money is not income as you are in debt; you have not
gained anything, whereas income from work is gained for your benefit without
attached debt.
b. Income is not a mere realisation of assets such as selling a house. Although
you have made some money off this sale, it is not classified as income but
more of capital gains (discussed later).
4. Accretion, flow and trust.
a. Fruits & tree concept: Eisner v Macomber (1920)US 189
b. Any exploitation (use) from capital assets is ordinarily of an income nature
i. Rent arising from lease of land
ii. Interest received on loan money
iii. Royalties derived from grant of a license
iv. Dividend
5. Reliance, Recurrence & Regularity:
a. Must be recurring and regular not a Windfall like in FCT v Harris 80 ATC
4238 ( employee not assessable on good will from employer as is one off)
b. Keily v FCT 83 ATC 4661: pension payments were of income nature as they
were recurring and there was continued expectation of them.

6. Income must be money or Convertible to money:

a. Tennant v Smith (1892) AC 150: Income must be in some cash or cash
convertible form or else there is no gain that can be taxed. In this case attempt
was made to include free accommodation in taxable income House of Lords
concluded this is not possible.
b. NOTE there are statutory non-cash rules under s21 ITAA36 (p.1296)
whereby non-convertible considerations such as property or service provided
wholly or partly in a business relationship maybe treated as convertible into
cash
Residence- Taxable income:
6-5(2) ITTA97 if you are an Australian resident, your assessable income includes the
ordinary income that you derived directly or indirectly from all sources, whether in or
out of Australia, during the income year.
Generally a person who lives in Australia or has been here intermitted for one half of
the tax year. A person who is a member of a superannuation fund, an eligible
employee OR a company that has been incorporated, carries on business or has central
management in Australia REFER TO s6 (1) ITAA36 (p.1288).
DeBeers case: Most decisions made in South Africa. But higher order decisions made
in London. Court found the company was a resident of LONDON. Also contests the
idea of carrying on of business. You can argue that because central management of
control in Africa not in London, they tried to argue that they should not pay tax in
London.
Esquire case: Directors located in other country, they only followed the decisions of
the accountants in Australia. The directors were found innocent and did not need to
pay taxation.

Definition of a resident
(s6(1) ITAA 36
Individual tests
Resides test
Domestic and permanent place of abode test
183 day test ( been here for 6 months )
Commonwealth superannuation test ( member of a super fund here )
Companys tests
Incorporation test (where was it incorporated?)
Central management and control test (where their board of directors make their
decisions.)
Control of voting power test (Where do the majority shareholders reside).

INCOME FROM PERSONAL EXERTION/ORDINARY AND STATUTORY

INCOME
Payments that are personal gifts
Scott case: payment was made to the taxpayer as a personal gift as a result of personal
friendship. Remunerated for his services and received the 10,000 pounds as a gift for
representing his client for many years.
Seymour: he received $10,000 as a retirement gift. This was a club tradition. It was held to be
a gift for his personal attributes rather than his cricketing.
Reward for services
Dean & anor v FCT: payment made to two employees of a company in exchange for for the
employees agreeing to remain employed by the company for a period of 12 months. Income
nature as it was remuneration based on their profession
Brent v FCT: payed for doing interviews, sharing photos and stories, she was simply
rewarded for her services and for taking the time to sit and give an interview.

Voluntary payments that relate to professional activities

Calvert v Wainwright: tips received by a taxi driver is of an income nature also applies to
waiters as it is remuneration for services rendered
Payments that are incidental to employment
Kelly: his employment made him eligible for the TV prize. Had it not been for his job as a
footballer he wouldnt have been nominated.

Payments that are substitute for salary

FCT v Dixon: supplement from his former employer to make up for the difference between
his military wage and his civilian wage. Still assessable income as substitute for the wages he
would have received otherwise.
Payments for relinquishing rights
Pritchard v Arundale: payment made to an accountant to leave private practise and work for
a company. Deemed a capital nature as he was not to start work until 6 months but received
the amount before hand he could have died before any services were rendered.
Payment for entering into restrictive covenants
Higgs v Oliver: pay the actor to not appear in any other film for a period of time. Payment
was made in consideration for the taxpayer agreeing not to perform work instead of agreeing
to perform therefore it is of a capital nature

Categories Ordinary income

Income from personal exertion

Income from business

Rewards for services and payments

The ordinary proceeds of a business

incidental to employment, but not

and profits from trading transactions,

gifts or payments for relinquishing or

but not gains from the mere

restricting rights.

realisation of capital assets.

Income from a profit making scheme

Income from property

Profits from isolated commercial

Flows from the use of capital assets

transactions entered into with purpose

but not gains accruing to capital

of making a profit

assets

BUSINESS INCOME
Page 264-280.
Is there a business?
Business Defined by s995-1 (p. 1214). Business included any profession, trade, employment,
vocation or calling that does not include an occupation as an employee. Is it a hobby? Or is
the person in the field of the business. What are your intentions are you attempting to
purposely make a profit? If so it is likely to be a business.
How can a person argue that they are getting income from business (so they can get a
deduction)?
1. Business income is generally any gains flowing from trading transactions (example.
Selling iPhones for money), or that represent ordinary Proceeds (example)
ordinary incidents (example) of a business activity. These are often income in
natures.
2. IT IS NOT a gain arising from a realisation of an ordinary investment which are
capital in nature.
A. BUSINESS SUSTAINED, REGULAR & FREQUENT TRANSACTIONS

i.

Hyde v Sullivan: Business will generally have a system, organisation &

scale.

ii.

Fergusion v FCT: Naval officer leased 5 cows in 4 years and claimed that
he was farming and in the trade of cattle breeding. Commissioner said no,
just a hobby there is only a small number of cows and no money being
made. FULL FEDERAL COURT RULED IN FAVOUR OF THE
OFFICER AND SAID HE DID HAVE A BUSINESS. Due to the fact that
he was taking all procedural steps one would take in carrying on of
business.

iii.

JR Walker v FCT: He had only one Angora goat. Using genetic

engineering to breed goats. Court said tax payer was taking systematic
steps in profit making (regularity etc)

B. GAMBLING:
i.

Brajkovich v FCT: Claimed many deductions under the view whether he

was carrying on of business. There is potential scale and the intention to
make profit from gambling FULL FEDERAL COURT SAID
TAXPAYER WAS NOT CARRYING ON BUSINESS AS THE
TAXPAYER WAS SIMPLY INDULGING A LIFE LONG PASSION.

C. TURNING TALENT INTO PROFIT:

i.

Stone v FCT: She was a police officer. She was also an athletic javelin
thrower. In her taxation she put down her police income down but not her
sporting income. She claimed that she participated in the sport for the
glory and joy of it. She also claimed that this is not her PRIMARY
OCCUPATION. THE COURT FOUND THAT ONLY THE
COMMERCIAL ARRANGMENTS SHE MADE WERE TAXABLE
THUS SHE WAS RUNNING A BUSINESS.

D. COMMERCIAL CHARACTER
i.

If you own a chip shop you essentially have a commercial business as it is

conceived as such as opposed to say collecting star wars toys

ii.

VBF v FCT : He was recognised as a business from the time he had

established his artwork as a format capable of exploitation

Is the income from business?

1. Mere realisation or income?

Californian Copper principle is the distinction, in this case although the sale
of land should have been capital, there was no intent originally to use this in
terms of an ordinary investment but to instead endeavour to profit thus an
assessable trading transaction was present. This was not a substitution of one
asset for another, this was a trading transaction. They were selling this to make
a profit not to buy another asset. THUS THIS WAS TAXABLE.

2. CMI Service principle - Must look at nature of transaction, character of assets,

nature of business and specifics of realisation to determine if it is income.

GP international Pipe-coaters: Company established by government. Contract

was that they need to build the pipe coating plant; the tax payer was allowed to
keep this at the end of the project. All elements were assessable as it was all a
part of a profit making scheme, THE SALE OF THE PLANT WAS NOT A
MERE REALISATION OF ASSET.

Whitfords Beach v FCT: Gentlemen bought land around their shacks under a
company banister. Others got interested in the land and the gentlemen sold it
for a mass profit. The gentlemen (fishermen) argued not taxable as they only
originally bought the land to protect their scenic view thus this was a mere
realisation of assets. THUS COURT SAID THIS IS TAXABLE INCOME as
it later transformed to A PROFIT MAKING SCHEME.

Myer Emporium (1987): Made a loan to a related company and then sold the
loan to citycorp. Myer argued that this was a mere realisation scheme.
COURT ORDERED THAT THIS WAS INCOME. The transactions were not
independent but reliant on one another.

3. Lease incentive cases:

FCT v cooling: Lease incentive for firm of solicitors: This was seen as a profit
making scheme as they entered into the contract with the intention of making
profit. In Montgomery they moved because of asbestos issues not due to
wishing to make profit off of the lease.

4. Selling Know How.

Moriarty v Evans medical supplies: Drug manufacturing in Burma. Entered

into transaction of selling secret process to allow for the manufacture. Argued
that this was sales of capital. COURT AGREED IT WAS CAPITAL

Rolls-Royve Ltd v Jeffery: Selling designs to others also argued that it was
capital. COURT DISAGREED

THE DIFFRENCE WAS IN MORIARTY YOU HAVE SOLD RIGHT

FOREVER, YOU HAVE NO CONTINUED or FUTURE PROFIT. ROLLSROYCE was in the BUSINESS of selling its rights to engines. IT
CONTINUED TO RECEIVE and sell rights to others around the world.

Statutory income:
Is used to get around fraudulence where someone tries to pay without cash. Eg: I cant pay
you your accounting fees but you can use my gym all the time. PROBLEM is you cannot tax
it as it is not a cash consideration. GO TO THE STATUTE TO FIND WHETHER ITS
CONVERTIBLE TO CASH
Thus s21A and s21A(2) (p. 1296)

Capital Gains Tax: Chapter 21.

Capital gains tax was introduced on the 20th of September 1985. Previously there had
been a bias. Taxpayers would be taxed on their income whilst others were not taxed
on the mere realisation (selling ) of assets. Thus CGT was implemented to promote
equality of tax practice.
You essentially only pay half of the value of your capital as taxable income if it is
decided that it is capital. The government policy motivation behind this is that it
accounts for the changing value of money over time. It was a replacement practice to
indexation.
IT IS A TAX ON THE GAIN MADE FROM THE SALE OF THE ASSET(50% of
the gain is income that is added to your assessable income for the year)
You would want to get taxed under CGT instead of income tax because then you only
get taxed on 50% of the gain made from the asset)
10

 NOTE THIS IS NOT SEPARATE FROM INCOME TAX. IT forms a part of

statutory income
Important concept:

Gain = Capital Proceeds More than Cost base (s110-25 P.484)

Loss = Capital proceeds less than reduced cost base

What did you pay for it; what did you end up getting for it?

What is Taxable?1. S102-5 (p.426): Net Capital Gain (page 454 FTL)
a. Equation for Net capital gain=
Capital gains for the current year (Current year capital losses + net capital losses
from prior year)
b. Reduce the figure derived from the above equation by the relevant discount.
i. 50% for individuals
ii. 33.33% for superannuation funds.
iii. 0% for companies (companies get nothing)
c. Reduce by small business concessions.

e.g maria made 100,000 capital gain on sale of rental property and 5000 on sale of shares. In the same year she
lost 10,000 from other shares. In the previous year, 5000 was lost from sale of machinery.
100,000 + 5000 (capital gain current year) (10,000 (current year loss) + 5000 (previous year loss
carried forward)) = 90,000
90, 000 x50% (apply deduction assuming this is an individual)= 45, 000 that can be assessed as statutory
income

2. Net capital Loss s102-10 (p.427) & (pages 455 FTL)

Equation net capital loss= current year losses current year gains
CGT Events:
Gains from CGT are based on events. These are found on page 460 of FTL. These try
to take into account as many transactions as possible.

11

CGT Assets:
S108-5 (p. 470)
Is property or a legal or equitable right.
Collectables: (can only offset Collectable losses against collectable gains)
Are items that are often for personal use

Art Jewellery, Antiques, Coins & medallions

Rare folios, manuscripts or books

Postage stamps, first day covers

Interest, Debt or option in relation to s108-10 (3)

Cannot separate a set of collectible items

Capital loss 108-10(p.471): can only be applied to collectable gains. For example in a
normal situation if you make $100 gain on NAB shares but a $100 loss on BHP shares
then these cancel out. If it is collectable and you make $100 loss you can only ever
offset that against another collectable gain.
If it is collectable that was acquired for = or < $500 you can ignore capital gains or
losses.

Personal use Assets:

These are items that are mainly for personal use
A personal use asset is:

a CGT asset, other than a collectable, that you use or keep mainly for the personal use or
enjoyment of yourself or your associates

an option or a right to acquire a personal use asset

a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use
and enjoyment

a debt resulting from you doing something other than gaining or producing your assessable
income or carrying on a business.

12

Personal use assets may include such items as boats, furniture, electrical goods and household
items. Land and buildings are not personal use assets. Any capital loss you make from a
personal use asset is disregarded.

Bert recently acquired a gold ring for $400 and an antique chair for $2000. If he sold
the gold ring for $800, he would disregard the capital gain as he acquired the ring for
less than $500. If he sold the antique chair for $1500, he would make a loss of $500,
but would only be able to apply this loss against a gain made against again made on
another collectable. Therefore, he couldnt use the $500 loss to reduce a capital gain
made on, for example, his shares. ( page 467)

Sara acquired a plasma tv for $8000 and a lounge for $9000 for home use. If she sold
the tv for $6000 she would disregard the loss of $2000 as it was made in respect of a
personal use asset. If she sold the lounge for $13,000, she would disregard the gain of
$4000 as the lounge was acquired for under $10000. If, however, sara had acquired
the lounge for $12000, she would have to recognise the $1000 gain. ( page 467)

Land and buildings are excluded (doesnt include) s108-20 (3) (p.472)
Cant separate sets s108-25, 30 (p.473)
Losses are disregarded and the gain is disregarded if it is acquired for $10,000 or less
s118-10 (p. 526)
What did it cost you?
Money paid plus Market value (market value) of property given or required to give
Capital Proceeds:
What you are getting from the sales of capital excluding GST as appropriate.
S116-30 (p.522) MV substitution; Nothing received; cannot be valued; proceeds less
than MV and not dealing at arms length or C2. (if you give a cgt asset to another
person without receiving anything in return it is seen as if you received market value
for it even though you may not have actually received any money for it)
Assumption of liability s116-55 (p.524) secured over asset. (so if you sell a house for
150,000 and had a 100,000 mortgage over it, technically the gain is only 50,000
however if when selling the new owner takes over your 100,000 mortgage then you
13

have actually received 150,000 which counts as your proceeds and the gain as it is the
50,000 from the sale and the 100,000 because you no longer need to repay the
mortgage which is a theoretical saving)
Exemptions from cgt:
1. Main residence s118-110 (p. 525)
2. Pre CGT Assets Before 20th September 1985
3. Cars s118-5 (p 526)
4. Trading stock s118-25 (p 530)
5. Depreciating assets s118-24 (p530)
6. Other specific exemptions see Page 471 FTL
7. Temporary residents s768-915 (p 1060)
8. Deceased estates.
Discounts for Capital Gains
Must have held it for 12 months- if you havent held it for 12 months you dont 50%
discount and instead have to pay tax on full amount of gain
Cant also index
You calculate discounted portion after applying losses
50% for individual or 33.33% for superannuation funds. S115-105

Small business concession:

S152 (p.625):

Entity must be small business entity or partner in a small business,

Categorised by:

Less than 6 million assets including connected entities and affiliates

Taxpayers that own assets used might also qualify.

Active asset condition:

Just before event or when business ceased

Half the period it was owned or 7.5 years

Owned, used or held ready for use in course of carrying on business

(also by affiliates or connected entities) or inherently connected.

Concessions for small business owner. (p.404 FTL)

14

Applied after discount

If held for 15 years you can disregard gain; over 55 etc; companies and trusts
can disregarded as well as long as they have had a significant individual for 15
year condition met

50% reduction- s152-210.

Retirement- Lifetime retirement limit of $500,000; if under 55 then place into

Superannuation Fund

Small business roll over- of nothing after 2 years, then J5 and J6 happen to
create a new gain

Main residence exemptions

S118-110: disregard gain or loss ownership interest in dwelling that is main

residence.

Does not apply if you dispose of part but not the main dwelling.

Under s118-170 if there are separate spouses then you look at their separate
interests

Fringe Benefit Tax & Goods & services tax:

Fringe Benefits Tax:
Fringe benefits include most kinds of non-salary benefits provided in respect of employment.
These are often provided by the employer to the employee and as such are payable by the
employer. Statutory definition PAGE 1,970
FBT = Fringe benefit taxable amount x FBT rate
Current year FBT rate is 47%.
Requirements:
Section 136 Pg. 1,970.

Provided any time during the year of tax

Provided by the employer
Or to an associated of the employer
Person must have facilitated the provision or participated in such a scheme involving
the provision of the receipt (employement)

15

Statutory Formula (default)

TAXABLE VALUE =

Emp
Employer pays FBT

Operating cost method (Election to use)

Taxable value =
(Operating Cost x (100% BUP*)) Recipients Payment
*BUP: Business Use Percentage

Example: FBT Statutory formula

An employer purchases a car for $30,000 (including GST) plus registration and
stamp duty of $1,000 and a roof rack for $500 on 1 August 2013; however, it was only
available for private use by the employee for 182 days from 1 October 2013.
The employee pays fuel costs of $1,000 and provides the employer with the necessary
declaration.
What would be the taxable value of the car fringe benefit for the 2013/14 FBT year?
Cost base= $30,500 (total cost of investment, e.g car and the roof rack costs)
Stamy duty doesnt count $1000
Equation:

0.2 X

30 500

(182
365)

16

- 1000 = $2000 (taxable value of car fbt)

Goods & Services Taxation:

Is this equitable:
Depends on argument. We believe that the more you earn the more tax you
should pay. Thus in this regard no it becomes a regressive tax.
However the fact that it does apply to everyone makes it fair and equal in that
regard.
Efficient and simple?
Yes pretty simple.
Not efficient because in some cases there are many exemptions and thus
creates many arguments which slow the procedural efficiency of the tax.

17

GST Key Design &Features:

Commissioner of Taxation v Qantas Airways Ltd (2012) HCA 41: (SUPPLY)

Many people book flights but do not show up.

Qantas argued that the money that was paid did not have a GST obligation we didnt
supply the flight, no one showed up, thus not need to pay GST
COMMISSIONER argued and COURT argued that Qantas was suppling contractual
rights.
THUS QANTAS HAD TO PAY GST.

GST Free Supply: things you dont pay gst on. E.g fresh food
Division 38 of GST legislation.

18

Input Taxed Supply:

This is a supply that the seller cannot charge GST on and also cannot claim any GST
incurred in relation to that supply.
Examples of input-taxed supplies include:

supplied by school tuckshops and canteens

-operated devices

GST SUMMARY TABLE

ITC=INPUT TAXED CREDITS

19

Deductions: Chapters 13, 17, 18, 19

Limbs of Deduction:
POSITIVE S8-1 ITAA97 (p.99): You need to satisfy this criteria to get the deduction
You can deduct from your assessable income any loss or outgoing to the extent that it
is.
1)
a) Incurred in gaining or producing assessable income or;
b) Necessarily incurred in carrying on business for the purpose of producing
assessable income.
Note:

Division 35 prevents losses from non commercial business activities

that may contribute to a tax loss being offset against other assessable income.

NEGATIVE S8-2 ITAA97 (p.99): Cant get deduction if satisfy a part of this limb
(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 *non assessable non exempt income; or

(d)

a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12 5.

(3)

A loss or outgoing that you can deduct under this section is called a general

deduction.

Process of analysing deduction:

Separate all the limbs of the analysis for the situation.

Consider the importance

If you say something is not deductible IDENTIFIY THE LIMB

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Extent- how much is used for personal or work purposes

This is concerned with the extent that an event relates to generation of income. For
example you go to a holiday and take an extra 5 days holiday there by paying your
own additional accommodation. Another example is computers used for work.
In Ronpibon Tin NL v FCT court says you apportion.
Nexus/ Link to positive limb
1. CT v Ash- argues whether the nexus is a step towards earning your income.
2. FCT v Smith- the link does not need to be in the same year. You dont have to show
immediate income generation
3. Fletcher- The assessable income in section is not to be read to be confined to that
years assessable income
4. FCT v Day (2008) 236 CLR 163- is the occasion of the outgoing found in whatever
is productive of actual or expected income.
5. FCT v Antsis (2010): Are the loss/outgoing incidental and relevant to the
operations/activities from which the assessable income is produced.
Herald & weekly Times Ltd v FCT & FCT v Ash

Both cases they were found to be spending money on their reputation. For the
newspaper case (weekly times) the court allowed the deduction as it was expected and
relevant for it to expend funds in such practices. The solicitor on the other hand was
not allowed his deduction as the expense concerned a retired partner. It was not
considered as necessary for the ongoing reputation of his business.

Essential character/nature of the loss/Outgoing:

FCT v Cooper:
Rugby player
Instructed to eat more steak, potatoes and beer.
It is not relevant to his profession NOT ALLOWED TO CLAIM DEDUCTION.
WILCOX: This is not a part of his ordinary behaviour, although food is not special on
its own.

21

Timing:
You cant claim deductions for a business that is still non- existent: Softwood Pulp & Paper.
Negative Limb-Capital
ENDURING BENEFIT TEST:
o Like an asset
o British Insulated & Helsby Cables v Atherton
BUSINESS ENTITY TEST:
o Profit yielding structure, the tree not the fruit
o Sun Newspapers-payment made to keep rival out the way. Issue was whether
this money was deductible? COURT SAID THAT THESE WERE CAPITAL
NATURE AS IT WAS SUCH A SIGNIFICANT PAYMENT THAT IT
AFFECTED THE FUNDEMENTAL STRUCTURE OF THE BUSINESS
AND NOT A DAY TO DAY EXPENSE.

Limitations: Division 26 ITAA97 (p.164)

Double deductions: s8-10 ITAA97
Penalties and illegal activities- s26-5, 26-54 ITAA97
Non-commercial loss rules- Div 35 ITAA97 (p.235)
Taxes- ss25-5 (2) (p.153)
Student contributions s26-20 (p.166)
Entertainment s32-5 ITAA (p.226)
Issues related to specific deductions
Checklist in s 12-5 ITAA97 (p.123)
Repairs in s25-10 ITAA97 (p.154)
Prior year loss in Div 36 ITAA97 (p.239)
Deducting amounts for the depreciating assets
S40-25 (1)(2)(7) (p.252)
S40-30 (1) (2) (p.253) Depreciating assets

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Calculating Declining value

Decline in value (40-70, 40-72, 40-75, 40-80 ITAA97) determined by reference to a

range of factors, in particular:
assets effective life (40-95 ITAA97) taxpayer can self-assess or, if the
Commissioner has determined an effective life for the asset, you can used the
Commissioners determination.

Small range of assets have their effective lives set out in the ITAA97
itself.

Trading Stock: Chapter 20

Derived:
What does it mean?

Income has come home in the most appropriate sense in the

circumstances, or that the method of tax accounting is calculated to give a
substantially correct reflex of the taxpayer's true income Cardens case
(1938) 63 CLR 108 (Dixon J)

Main Methods:

Cash:

Employee salary and wages

Usually- payments for services by independent contractors

operating as a sole trader

Accruals:

Usually used for professional partnerships

Typically applies to trading businesses.

Constructive receipt:

S6-5 (4): amounts which are applied or dealt with in any way on behalf or
as direct are received by the tax payer.

Perrott v DCT (NSW) (1923) 23 SR (NSW) 118: Designed for where the
taxpayer may not have actually received the money but has received the
benefit of it or of something that is equivalent to it.
23

Incurred:
Is incurred when the taxpayer is definitively committed or completely subjected. FCT
v James Flood Pty Lrd (1953) 88 CLR 492
Generally must have a presently existing monetary liability: FCT v Malouf (2009)
Does not matter that the money is not payable until a future time: FCT v Citylink
Melbourne Ltd.
Accounting style matching principle- outgoing allowed to the extent it is properly
referable to the income year: Coles Myer Finance Ltd v FCT.

Trading stock:
What is it?

S70-10 ITAA97 (p.365)

Effect:

S70-15ITAA97: Deduction for purchase expenditure deferred until stock on

hand: Farnsworth v FCT (1949).

S70-35 ITAA97 (p.368)

24

 Valuation

Value of 0 for the start of the year if value of trading stock was acquired in
that income year s70-40 (2) (p.368)

Value at the end of the year choice between:

Cost

Market selling value

Replacement value

Company Taxation: Chapter 24 FTL

Business Enterprise Overview.
FTL [24.1]-[24.2], [25.1]-[25.2], [26.1]-[26.2]

Choice of Form Table LMS

Table from P Kenny, Australian Tax a mix of tax and legal differences

Note from these:

Co = separate legal entity and is treated as such by tax law. You will see that this is
different to the flow-through treatment for trusts and partnerships.

Income/losses taxed in hands of company at 30% tax rate NOT shareholders (who
might be considered the economic owners).

Shareholders are separately taxed on distributions subject to imputation system (not

for returns of capital).

Income/gains do not retain their original characteristics when distributed. Eg a capital

gain made by a Co will not be treated as a capital gain in the hands of members if the
company pays a dividend from the profits represented by that gain.

25

Taxation of Company
What is a company for tax purposes and is it a taxable entity?
ITAA 1997, ss 4-1, 9-1, 960-115, 995-1(1)
Corporate tax entity

Company

Corporate limited partnerships

Corporate unit trust

Public trading trust

ITAA97 s995-1(1); ITAA36 s 6(1)

Company means:
(a)

A body corporate; or

(b)

Any other unincorporated association or body of persons;

but does not include a partnership or a *non entity joint venture.

Very broad (broader than general law)

So (a) would apply to:

Entities incorporated under the Corporations Act 2001 (Cth).

Entities incorporated under other legislation, such as Cth: Corporations (Aboriginal
and Torres Strait Islander) Act 2006; State: the Associations Incorporation Act 1987
(WA).

(b) Would apply to: unincorporated bodies, eg sporting clubs, societies etc But not a
partnership.

Public and private companies

ITAA 1936, s 103A

Relevance: eg
o Franking public companies have 2 rather than 1 franking period in each 12 months
for Benchmark Franking purposes.
26

o Deemed dividends a number of distributions such as loans from private Cos to sh/h /
associates are deemed to be dividends in cert circ. Private Co may also have
deductions denied for such payments in some circumstances.
o Losses the continuity of ownership rules are relaxed to a degree for certain public
companies
What is the company tax rate?
30%: ITRA 1986, ss 23, 24, 25
Proposed cut to 28.5% from 1 July 2015 (though proposed paid parental leave scheme
levy of 1.5% for large companies)
Establishment/Acquisition
What is your investment interest in the company?
Flexibility to issue different classes of shares, debt interests and hybrids: eg
Corporations Act ss 254A, 254B, 124
Tax law (partial) response: debt/equity rules in Div 974 ITAA97. Essentially look to
economic substance (effectively non-contingent obligation) over legal form and this
characterisation is then applied for a range of tax provisions.
Company
Taxation Of Financial Arrangements (TOFA) - limited for equity interests.
CGT - exceptions to CGT Event D1 or H2 for creation of debt or issuing equity
interests, non-equity shares or debentures
Interest holder
Trading stock (or otherwise on revenue account)?
Capital item (CGT cost base due to acquisition under s 109-10 ITAA97)?
TOFA?

27

Operation:
Taxation of Dividends and Retained Income
Description

Taxation of Dividends & Retained Income

Tax imposed at Co level (franking credit 205-15(1))
Distributions to shareholders taxed (44(1) ITAA36) and
grossed-up to include (some/all) tax paid at the Co level
(207-20(1)) and entitlement to offset for Co tax relating to
the distribution (207-20(2))
Franking credit in franking account of franking entity
shareholder (items 3&4 of 205-15(1) table) and franking
debit for payer Co (item 1 of 205-30(1) table)

Entities to which the model Franking entity that satisfies a residency requirement when
applies
a distribution is made (202-5(a))
Neutrality
Potentially no double taxation of distributed income unless
Direct/indirect investment
tax preferred income
Retaining
vs
distributing Retention of income preferred by higher rate taxpayers and
income
distribution preferred by lower rate taxpayers
Sh/h at different income levels As tax offsets are refundable (Div 67) for many lower rate
sh/h - should not be disadvantaged in respect of distributed
Debt/equity financing
income
Bias in favour of debt likely to be reduced by the existence
of franking offsets
International

No franking offset
Franked dividends are exempt from withholding tax
(128B(3)(ga) potentially no further tax depending on
home country taxation
Unfranked dividends will be subject to withholding tax at
30% (or lower under DTA) 128B(1)

Company
Franking (s 202-5 ITAA97) --> will impact on the company's franking account (div 205
ITAA97)

Most 'corporate tax entities'

Residency requirement applies

Distribution must be a frankable distribution (ss202-40, 202-45 ITAA97)

Corporate tax entity must allocate a franking credit to the distribution

28

Deductions?

ss 25-85, 26-26 ITAA97

The distribution as income under s 44 ITAA36

ITAA36 s 44(1)(a): dividend, paid, to shareholder, by company, out of profits include in

assessable income.

o We will not focus on the residence and source issues raised by 44(1)- ie whether it
is an Australian resident receiving the dividend or whether it is a Non-resident, in
which case source of profits is relevant.
o For our purposes, assume Australian residence as Non-residents will likely be
subject to withholding tax rather than taxation under 44(1)(b) to the extent that the
dividend is unfranked due to 128D.

Company: ITAA36, ss 6(1) & 44

Dividend: ITAA36 s6(1)

limb (a) distribution
Does not matter if the distribution is illegal/contrary to the Corporations Act: FCT v
Blakely (1951) 82 CLR 388
Must be a dealing out or bestowal of property mere release of rights will not suffice:
DFCT v Black (1990) 25 FCR 274
limb (b) amount credited by a Co to a sh/h as sh/h
relates to something of which the shareholder receives the benefit in account with the
company, even if there is no payment of anything to [him]: Commissioner of Taxation (Vic) v
Nicholas (1938) 59 CLR 230
must be a binding obligation on the Co to effect a distribution and some action to
discharge that debt for a crediting to occur: Brookton Co-operative Society Ltd v FCT (1981)
147 CLR 441. A book entry recording a debt is not sufficient a loan/debt must actually be
created with the consent of the shareholder; or a set-off of pre-existing liabilities must occur.
must be to the sh/h in their capacity as a sh/h: DFCT v Black. Not for forgiveness of a debt
in the capacity of debtor
Dividend does not include:
Limb (d) - amounts debited against the companys share capital account (unless tainted ie nonshare capital amounts transferred to it).

29

Paid: ITAA36, s 6(1) paid in relation to dividends or non-share dividends includes

credited or distributed. Doesnt double-up with the definition of dividend, rather it is
a timing rule which triggers derivation under s 44(1).

Shareholder: ITAA36 s6(1), #FCT v Patcorp Investments (1976) 140 CLR 247

Out of profits: FCT v Slater Holdings Ltd (No 2) (1984) 156 CLR 447, ITAA36 s44(1A)

Gross-up and offset for franking credits

ITAA97, div 207
Integrity rules, including new dividend washing rule
o Effect is that the amount of the distribution received is included in assessable
income PLUS the amount of the franking credit attached to the distribution.
o In addition, the taxpayer receives a tax offset equal to the amount of the franking
credit attached to the distribution (Remember: s4-10(3) Income Tax = (Taxable
Income x Tax Rate) Tax Offsets)

30

Corporate Distributions in Other Forms

Share Buy Back

Capital Reduction

257A CA

256B CA

Equal Access

Equal/Selective

Liquidation
Distributions / De
Facto Liquidation
Distributions

Company
Dividends

De Facto Distributions:
Loans/Payments for
Services

254U CA (RR)
Rights Issues /
Bonus Shares
(254A(1) CA)?

Assets > liabilities / fair

and reasonable / no
prejudice 254T CA

If Co distributions are not dividends for tax purposes, the tax system may still recognise their
receipt by shareholders in some fashion. For instance:

Eg capital reduction resulting in cancellation of shares (CGT event C2) or no

cancellation of shares (reduction in cost base under CGT event G1 until all cost base
used up, then capital gain recognised).

On market share buy-back would result in CGT event A1 (deemed that no part of
purchase price is dividend)

Off market share buy-back likely to involve part dividend and part capital, with rules
which deem inclusions/exclusions to reflect market value (try and prevent generation
of unreasonably large capital losses or generation of overly generous dividends with
franking credits).

Private Cos: Div7A of PtIII ITAA36 deemed dividends (unfrankable) (disguised

profit distributions payments, loans, forgiven debts to sh/h or associate).

Private Cos: s109 ITAA36 deemed dividends (unfrankable) for unreasonable

remuneration or for allowance in consequence of retirement/termination. To
current/former Ds or sh/hs and associates.

Ordinary income: FCT v McNeil (2007) 229 CLR 656 (warning of breadth)
31

Payment/loan/debt forgiveness by a private company under Division 7A ITAA36

Unfrankable distribution for Co --> s202-45(g)(i) ITAA97

Deemed to be a dividend and paid out of profits, bringing it within s44(1) for the interest
holder.

Section 109 ITAA36 excessive payments for services/ retirement/ termination

ITAA 1936, s 109

For Company, the excess amount is not deductible and not frankable

For interest holder, the excess is deemed to be a dividend and paid out of profits.

Company Tax Losses

Div 36 ITAA97

Can deduct the loss in a future income year --> refer 36-17
Rationale: The rationale for allowing a deduction for tax losses is based on equity. It
would be unfair to tax a person on income derived in good years without making
allowance for the economic effects of bad years.

But limits exist in order to stop trafficking of tax losses (ie to stop people buying companies
with the main purpose of accessing their tax losses in circumstances where the purchase had
no economic interest (and risk) in the Co at the time it incurred the losses).

Key limits summarised in items 1 and 2 of the table in s 36-25 ITAA97:

Change of ownership test (COT)

Same business test (SBT)

32

Liquidation/Disposal of interest.
Liquidation distributions
ITAA 1936, s 47
For the company:

The s47 amount is frankable

Beware distributions in specie of property (eg CGT)

Liquidator deemed to be the company for certain CGT purposes

For interest holder:

The s47 amount is a deemed dividend and deemed paid out of profits

CGT Events C2 and G1

CGT Event G3 liquidator declares shares worthless

Disposal by holder (not to company)

None for company

Various outcomes for the interest holder, including: disposal of trading stock, TOFA
balancing adjustment, traditional security provisions, CGT.

Partnerships & Trusts: Chapter 25 & 26

Partnerships
Definition- s995-1 (p.1242) Partnership is
a) An association of persons (other than a company or a limited partnership) carrying on
business as partners or in receipt of ordinarily income or statutory income jointly; or
b) A limited partnership
NOTE YOU CANNOT SET UP SOMETHING THAT IS NOT REAL PARTNERSHIP FOR
THE BENEFIT OF TAX SPLITING.
Binding one another with their acts
33

 Unless one has no authority to act and others know about it

Jointly and severally liable - discuss

Rights and interests per agreement between partners discuss tax issues

Act may fill blanks from agreement (similar to RRs)

When does a partnership come into existence?

Does not need a written component to form a partnership as it may be created from
the dealings.

Look for proof of relations of agency and community of losses and profits and sharing
of capital in some form IRC v Williamson

Documents and assertions not decisive; similar services contributions not decisive;
Banking not decisive

Tax lodgements not decisive

Contractual and so cannot include one who is unaware discuss

Taxation consequences of partnerships: (not a vital for the exam)

Contributions

Rose v FCT you have not disposed of the entire asset, only a fractional interest

Trading stock: usual is 70-90; 95 deemed MV disposal but this hard to apply to
Pship (why?)

So 70-100 special rule read it partial ownership transfer; full disposal deemed at
MV along with acquisition

70-100(4) can elect closing value; (6) has conditions read them 25% interested;
CV lower than MV etc; not a chose in action

34

Acts as roll over relief for disposing partner; what about others?

Depreciating assets: s40-30 asset; balancing adjustment 40-285, 295; 40-340, 345
can elect roll over if partnership disp; same issues

CGT: s108-5(2)(a) pship will be part disposal automatically; acq of individual

fractional interest s106-5 operate at levels of individuals, not pship different
important

How a partnership is treated:

Ss90-94 ITAA 1936 (Div 5 Pt III)

S91(p.1336) Return but no liability: they must lodge the expenses and income of the
partnership but do not get taxed on it.

S92 (p.1337)How to calculate net income of the partnership income and deductions
of partner read it! Note partners interest in net income or loss

S90 (p.1336) net income definition note as if ---resident taxpayer; also defines
pship loss

S290-150 excluded these are super contributions; Div 36 tax losses

Poole & Dight v FCT calculate by reference to pship activity not individuals what
is the relevance of this?

Borrow to repay partners capital account? Refinance principle allowed Roberts;

Smith does it matter what they do with the repaid amounts NO!

Subjective purpose of hypothetical tax payer collective purpose of pship Tikva

Investments v FCT; Pascoe v FCT

Trusts:
What is a trust?
35

Relationship

Not an entity

What does this mean? Is it relevant?

What type of relationship?

What are its origins?

o What is equity?
o Product of English law
o Recognises a distinction in property rights or ownership
o Legal ownership

Versus

Beneficial ownership

What is the difference?

What are the elements of a trust?

Trustee

Property

Beneficiary

Obligation

Note that as the ITAA1936 defines the term trustee, it may differ from true trustees

Types

Express

Implied

Resulting

Constructive

Fixed Discretionary

Be aware that they might arise in circumstances where they are not anticipated
Taxing Scheme

36

Div 6 Part 3 ss95-102

S96 trustees not taxable unless otherwise provided

S97 - beneficiaries taxable (When not under legal disability)

Note residents versus non-residents
Note exempt income; NANE same mechanism
Note not when s95A(2) applies (then see s98(2) trustee taxable)

Trustee taxable

S98 makes trustee liable as an individual with no deductions (s98(3))

S98(1) person under legal disability is PE then trustee taxable

Beneficiary not also taxable unless they derive other sources of income
or have many trust estates s100(1)
In this case beneficiary taxable & can have credit for tax paid
by trustee (no refund though- Case D52 72 ATC 326)

S98 (2A), (3), (4) & 98A: Trustee taxable when NR beneficiary Presently
Entitled
S98(2) assesses trustee when s95A(2) operates to deem present entitlement

S98A NR beneficiary also assessable

S98A(2) credit or refund for tax paid by trustee.

S99A (esp 99A(4))(4) trustee taxable special rates Normal special rates for
trustee provision may not apply to will or codicil trust etc (then s99)

When not taxed under 97, 98 and not pe of a NR & FSI

S99 trustee taxable normal rates when nobody elsewhere taxed

Applies when 99A does not (1) (ie only in rare circumstances will etc)

99(2) :No beneficiary assessable under 97

37

Trustee not caught under s98

Not income to which NR beneficiary PE and not Australian sourced

S99(3) covers apportionment

Net income
S95(1) defines net income read & comment
Resident issue
Trustee is taxpayer
Assessable income less deductions
But since 2011 year capital gains and franked distributions are under Subdiv
115-C and 207-B respectively; Div 6E of Pt III operates to alter net income
calc for these
Note the term net income is not the same as trust income (union fidelity & totlidge)
Presently entitled

Colonial First State Investments Ltd v FCT must be by year end! No two month
extension

Payment not relevant

Bamford; Harmer v FCT

Whiting the right to demand income

o Context was unadministered deceased estate
o Beneficiaries had no rights and no interest yet

Taylors case what about beneficiary under legal disability

o Problem with Harmer definition as legal disability and s98
o Said as if no disability
o According to Whiting cannot be PE
o BUT can be PE (s98 recognises this)
o So if they werent under disability, then they would be able to demand

Harmer good definition but again legal disability issue

o Interest in the income that is vested in interest and possession and
38

o Present legal right to demand and receive payment whether or not precise
details available (see Pearson v FCT on this) and regardless of fund of trustee
to pay

39