HA3042 - Taxation Law

Revision Slides
T2.2019
Characteristics of ordinary income:
Flow concept – examples

• Examples demonstrating the fruit / tree analogy:

Context ‘Tree’ ‘Fruit’

Employment Taxpayer’s ability Payment for
to work / contract services
Business Goodwill of the Sales / services
business
Investment Investment Rent
property
The income tax formula

 Income tax is payable each year by each individual and

company, and certain other entities: s 3-5 ITAA97.
 Calculation of a taxpayer’s income tax liability for the financial
year is based on the formula in s 4-10 ITAA97:

Income Tax Taxable Tax

Rate
Payable Income Offsets

 Financial year means a 12-month period beginning 1 July:

ss 4-1(1) and 995-1 ITAA97
• “Substituted accounting periods” may be allowed
by the Commissioner.
Overall guide: When is a taxpayer a tax
resident of Australia?

Is the taxpayer a resident of Australia?

Individual Company

4 tests of residence: 3 tests of residence:

1. Ordinary concepts; 1. Place of incorporation;
2. Domicile; 2. Central management
3. 183-day test; or and control; or
4. Superannuation test 3. Controlling shareholders
Ordinary income – general:
Commonly recognised categories of income

• Income is commonly categorised into three broad areas:

• Income from personal services and employment

1

• Income from business

2

• Income from property

3
General Deductions

• The main provision that provides taxpayers a deduction for an

expense is the general deduction provision:
General Specific
Deductions Deductions Deductions
(s 8-1) (s 8-5)

• Section 8-1 has the potential to apply to any taxpayer.

• A loss or outgoing (ie, an expense) may:
•Be deductible under s 8-1 and a specific provision. In
these cases, use the “most appropriate” provision: s 8-
10.
•Not qualify for a deduction under a specific provision. In
these cases, consider deductibility under s 8-1.
Specific deductions – Div 25

• s 25-1 – this Division sets out some amounts you can

deduct. Remember that the general rules about
deductions in Div 8 (which is about general deductions)
apply to this Division.
 Table of sections -
• 25-5 Tax-related expenses
• 25-7 Advice about family tax benefit
• 25-10 Repairs
• 25-15 Amount paid for lease obligation to repair
• 25-20 Lease document expenses
• 25-25 Borrowing expenses
• 25-30 Expenses of discharging a mortgage
Capital allowance Division 40

• You can deduct an amount equal to the decline

in value of a depreciating asset (an asset that
has a limited effective life and that is reasonably
expected to decline in value over the time it is
used) that you hold.
• That decline is generally measured by
reference to the effective life of the asset.
• You can also deduct amounts for certain other
capital expenditure.
• Second-hand assets can be included as
depreciating assets – market value or sale price
Tax Accounting

• Accounting for income tax purposes is different to financial

accounting. Timing differences arise.
• Taxpayers are required to pay income tax each “income year”,
which is generally the financial year: s 4-10.
• Consequently, the key issues in this topic are:

9
Definition of a fringe benefit

• Central to the imposition of FBT is the term “fringe benefit” as

defined in s 136(1) FBTAA.
• A fringe benefit exists where there is:
• Specific exclusions apply, eg, salary.

• A benefit
1

• Provided during the year of tax

2

• By an employer, associate or third party arranger

3

• To an employee or an associate
4

• In respect of the employment of the employee.

5
Categories of fringe benefits
• There are 13 categories of fringe benefits:
More common categories
(discussed in the next slides)
• Car fringe benefits
• Debt waiver fringe benefits
• Loan fringe benefits
• Expense payment fringe
benefits
• Meal entertainment fringe
benefits
• Property fringe benefits
• Residual fringe benefits
Less common categories
(not discussed)
• Housing fringe benefits
• Living-away-from-home
allowance fringe benefits
• Airline transport fringe
benefits
• Board fringe benefits
• Tax-exempt body
entertainment fringe benefits
• Car parking fringe benefits
Capital Gains Tax

• A gain characterised as capital is not subject to income tax

under ordinary concepts.
• Capital gains tax (CGT) commenced on 20 September 1985
and brings capital receipts into the tax base.
• A taxpayer’s income tax liability includes a net capital gain:

Assessable Ordinary Statutory

Income Income Income

Net
Capital
Gain
CGT Overview
CGT effects on taxpayer

• Ultimately, a “net capital gain” is included in the taxpayer’s

assessable income.
• Liability to CGT is determined by following the process:

• Have you made a capital gain or loss?

Step 1

• Work out the amount of capital gain or loss

Step 2

• Work out the net capital gain or loss for the income
Step 3 year-Discount and indexation method
Taxation of partnerships

• Partnerships do not pay tax and any partnership income is

included in the tax returns of the individual partners, as
follows:
1. Calculate the partnership’s net income
or loss

2. Determine each partner’s share of the

net income or loss

3. Adjust the partner’s assessment

income or loss for (examples):

Interest Capital gains

Partner’s payments to / and losses on Dividends of
salaries from partnership partnerships
partnerships assets
Taxation of partnerships:
3. Treatment of special partnership items

Partners’ salaries
• A partner’s salary is not regarded as an expense as a
partnership is not a separate legal entity, and thus not
deductible.
• This principle applies even if partners are paid extra amounts
over the share of partnership profits.
• Treated as an allocation of profits and losses
– See, Re Scott v FCT (2002).
Taxation of trusts

• The following flowchart summarises how a trust is taxed:

Step 1: Calculate net income or If net loss

Net losses trapped
loss of a trust in the trust

If net income

Step 2: Are any of the No

beneficiaries presently entitled Trustee pays tax under s 99 or
to the trust income? s 99A ITAA36
Yes

Step 3: Is the beneficiary Yes

presently entitled to the trust Trustee pays tax on behalf of the
income under a legal disability? beneficiary under s 98 ITAA36
No

Beneficiary pays tax under s 97

ITAA36
Taxation of Companies -Imputation system

 Income tax systems treats a company as a separate

taxpayer from its shareholders.
 Issue of double taxation under the classical system arises
when the same economic income flows from company to
shareholder:

Example: classical system - double taxation issue

Company level $
Taxable income 100
Total
Less: income tax payable (30%) 30
tax paid
= Net profit available for distribution 70 $63
Shareholder level
Dividend 70
Income tax payable on dividend (assume 47%) 33
Imputation system

 Imputation system addresses “double taxation” issue by

use of “imputation credits” and “gross up and offset”
mechanism:
Example: basic operation of the imputation system
Company level $
Taxable income 100
Less: income tax payable (30%) 30
= Net profit available for distribution 70
Shareholder level
Dividend 70
Gross Up: imputation / franking credit 30
= Taxable income 100
Shareholder’s tax payable Total
Tax on taxable income (assume 47% rate) 47 tax paid
Less: tax offset (30) $47
Income tax payable 17
 GST

• Tax on private consumption of goods and

services
• Is designed to be paid by the consumer rather
than by business
• Is collected by business
 GST is 1/10th of the value or 1/11th of the price
 What is entity and enterprise for GST ?
 Taxable supply, GST free supply and input
taxed supply
 Creditable acquisitions and importations
 Tax avoidance-The spectrum of tax
minimisation

Tax Tax Tax

planning avoidance evasion

• Tax planning (legitimate)

– Taking advantage of concessions and loopholes in
the tax law
 Tax avoidance
– Taxpayer attempts to use lawful means to reduce tax
liability
 Tax evasion
– Reduction or elimination of tax liability by illegal
means
 Common tax avoidance techniques

• Avoiding Australian sourced income from non-residents

• For example, common in joint venture projects in the
mining industry where the non-resident will perform
activities outside of Australia deriving foreign sourced
income.
 Deferring income derivation or accelerating deductions
• Structures designed to exploit this particular timing
rules: FCT v Australian Guarantee Corporation Ltd
(1984).
 Income splitting between family members
• Distribution of income and capital gains based on the
tax profile of the beneficiaries in a family trust.