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PITL brief update

:
• Will complete T2 this week - solutions to Study
Guide Topic 2 on CD; self assessment MCQs too

• Start CGT today – will do SBC (re: assignment)
in detail next class

• Assignment cover sheet is on CD.
1
Lease incentives: cont’d
FCT v Montgomery 1997 (High Court):
– Law firm needed to move, asbestos problem;
– Moved to 101 Collins St, got lease incentive when
entered into new lease there;
– Was ordinary practice in Melbourne at that time to
offer incentive;
– HELD: assessable OI.
MLC703 Top #2 – AI cont’d
2
When is Compensation OI? (text Ch 10)
Remember the basic principle that:
• Compensation for lost capital = capital; lost OI = OI;
• Meeks (1915)/Dixon (1952): Compensation payment
takes on character of what it replaces.
eg permanent loss of factory, compensation would be
capital.
• Loss of profit due to factory being burned down,
compensation would be OI; Why?
• Profit would have been OI, so compensation for it is OI.
MLC703 Top #2 – AI cont’d
3
When is Compensation OI? cont’d
Let’s look at some different types of compensation:
Compensation in a Business Context:
• Contract which goes to fundamental structure of
business;
• Compensation for cancellation of a contract will be
capital if the contract “goes to the fundamental
structure of the business”.
• In such an instance the compensation is being given
for destruction of your capital;
• So the compensation is capital (loss of capital).
MLC703 Top #2 – AI cont’d
4
When is Compensation OI? cont’d
Californian Oil v FCT 1934 (High Court):
• TP was exclusive distributor of certain products;
• This was the TPs only business – it did not buy/sell
any other products (had 5 yr agreement);
• The supplier cancelled after 2 yrs into contract and
compensated the TP for this cancellation;
• HELD: Compensation was Capital.
• The TP had had lost its entire business with the
cancellation of the contract – this action effectively
destroyed the business of TP;
MLC703 Top #2 – AI cont’d
5
When is Compensation OI? cont’d
• So TP was being compensated for loss of capital;
• Since contract, was of substantial importance to
business, compensation for its cancellation = capital.
Loss of Trading Contract:
• Compensation for loss of trading contract will
typically be OI;
• Why? Because being compensated for loss of profits.
Since profits = OI, compensation is OI;
• This is in contrast to compensation for contracts that
“go to the fundamental structure of the business”
which are capital.
MLC703 Top #2 – AI cont’d
6
When is Compensation OI? cont’d
Allied Mills v FCT (1989):
• TP had agreement to be sole distributor of some
biscuits, including Vita Weat;
• This wasn’t the only product that the TP distributed
(it had many other distribution agreements);
• The distribution agreement was cancelled (by the
seller) & the taxpayer was compensated for this;

• HELD: The compensation was OI.
MLC703 Top #2 – AI cont’d
7
When is Compensation OI? cont’d
Allied Mills v FCT (1989) cont’d:
• This is different from Californian Oil. Contract was not
of “substantial importance to structure of business”.
• Their business as a distributor & manufacturer would
continue to exist, they had plenty of other contracts
other than the one that was cancelled;
• Cancellation of contract represented a loss of profit
making opportunity rather than a loss of its capital.
• Since profit would have been OI, compensation for its
cancellation is OI.
MLC703 Top #2 – AI cont’d
8
When is Compensation OI? cont’d
So it would appear that if you are a seller of goods and
your contract to purchase goods is cancelled then:
• If the contract in question is a normal trading contract
then compensation for its cancellation will be OI
(Allied Mills) - the lost contract was a profit making
opportunity - compensation for loss of profit (OI) = OI.
• If contract is of fundamental importance to structure
of business it is capital (eg Californian Oil – cancelled
contract was the only supply contract of the TP);
• In such an instance, it destroyed the TP’s capital, so
compensation is itself capital.
MLC703 Top #2 – AI cont’d
9
When is Compensation OI? cont’d
So if supply contract (contract to purchase goods) is
cancelled, to determine if compensation is capital or OI:

• If the contract was of fundamental importance
eg was 100% of its goods OR a very high proportion
of its goods then compensation is capital (Californian
Oil);
• Otherwise, if just a normal trading contract, then
compensation for its loss would be OI (Allied Mills).
MLC703 Top #2 – AI cont’d
10
When is Compensation OI? cont’d
• This case issue isn’t so simple. Note the previous 2
cases dealt with purchase contracts, this one is sales:

Heavy Minerals v FCT (1966):
• The TP had been a miner of rutile;
• Had long term contracts to sell rutile at a set price;
• The market price of rutile dropped substantially below
contract price;
• The TP had temporarily ceased mining - it was cheaper
to buy rutile on the open market and sell it at contract
price to parties it had long term contract with.
MLC703 Top #2 – AI cont’d
11
When is Compensation OI? cont’d
• Buyers of rutile wanted to get out of their contracts –
their contract price was so much higher than current
market value of rutile;
• The TP agreed – as long as buyers compensated them;
• Buyers compensated TP for the right to get out of
contract to buy rutile at high price;
• What this compensation OI?
• HELD: Yes, was OI. Why?
• Contracts to sell rutile represented right to OI (fruit);
• Whereas the mine & equipment were the capital (tree).
MLC703 Top #2 – AI cont’d
12
When is Compensation OI? cont’d
• Cancellation of the contracts did NOT destroy the
business or substantially alter its capital;
• The business still had its mine & plant (though at this
point had chosen to stop using them);
• So compensation for the loss of contracts was OI
because it was merely a loss of a profit making
opportunity, not loss of capital;
• It is true that TP had for the meantime stopped using
mine & operation. But this was due to low rutile
prices, not due to contract cancellation.
MLC703 Top #2 – AI cont’d
13
When is Compensation OI? cont’d
To sum up:
• If you are a miner/manufacturer, compensation for
loss of sales contract will be OI;
• It appears that whether the business is buy and sell
goods, same conclusion – compensation for loss of
sales contract = OI.
MLC703 Top #2 – AI cont’d
14
Compensation for loss of Capital Asset:
• Permanent loss of capital asset = capital (eg factory
burns down);

• Temporary loss of capital asset = income (eg factory
unusable for 2 weeks);
• Why? Such compensation represents compensation
for loss of profit making opportunity for the lost use
of capital asset for that time period.

MLC703 Top #2 – AI cont’d
15
Compensation for loss of Capital Asset:
Glenboig Union Fireclay (English case):
• Mining company mined fireclay;
• Railway co. had tracks over part of the land to be mined
• As a result, TP could not mine that portion of land;
• Railway company gave TP compensation ie for loss of
use of part of land;
• Compensation amount calculated on the basis of profit
TP had lost due to portion of land not being mine-able;
• HELD: Compensation was capital, as was due to loss of
capital asset (ie part of ability to mine land).
MLC703 Top #2 – AI cont’d
16
Compensation for loss of Capital Asset:
• The fact that the compensation was calculated in
reference to loss of profit did not stop it being
compensation for loss of capital;
• Just because compensation is calculated in reference
to loss of profits, doesn’t mean that the compensation
is for loss of profits – it might be for loss of capital (as
was the case here);
• Why? Often capital items are valued according to
their future profitability (discounted future cashflows).
MLC703 Top #2 – AI cont’d
17
Compensation for loss of Capital Asset:
Note: loss of capital doesn’t only apply to physical capital
• It can also apply to intangible capital (eg goodwill):

Sydney Refractive Surgery Centre v FCT:
• TP was in the business of performing laser eye surgery;
• A TV current affairs show made an incorrect story on
this clinic – their business suffered as a result;
• The TP successfully sued the TV station for defamation
(ie compensation for loss of reputation);
• The compensation was calculated in terms of loss of
profit – how much profit had lost due to bad publicity.
MLC703 Top #2 – AI cont’d
18
Compensation for loss of Capital Asset:
• Was this compensation OI or capital?

• HELD: It was capital.
• Compensation was for loss of reputation – reputation
is part of the capital (goodwill);
• So compensation itself was capital because it was for
loss of capital;
• Again, fact that compensation was calculated in terms
of loss of profit didn’t stop compensation for being for
loss of capital.
MLC703 Top #2 – AI cont’d
19
Compensation for loss of Trading Stock:
• Compensation for Loss of trading stock (inventory) = OI

• Trading stock = ability to make profit;
• That profit would have been OI - so compensation for
its loss is OI as well.
MLC703 Top #2 – AI cont’d
20
Compensation in a Personal Context
Same over-riding principle applies:
ie compensation for capital/OI = capital/OI (respectively)

• Compensation for loss of salary will be OI (salary = OI,
so is compensation);
• Compensation for physical injury will be capital eg loss
of use of arm - compensation for pain, suffering,
medical expenses will be capital;
• Have previously discussed this when discussed income
from personal services (sl #22, wk 2 - “Distinction btwn
Payment for Services & Giving up a Capital Right”).
MLC703 Top #2 – AI cont’d
21
Compensation in a Personal Context
• If a worker is paid for giving up capital right rather than
being paid for working, then payment will be capital;
Let’s revisit Dixon’s case: FCT v Dixon (1952):
• During WWII, employer offered employees ”top up”
payments If they quit & volunteered to fight for army;
• “Top-up” payments by ex-employer were held to be OI;
• Justice Fullager: Replacement principle (compensation)
• Was replacing wages workers would have earned had
they not quit their jobs;
• So was OI – because wages were OI, compensation for
loss of wages is OI as well.
MLC703 Top #2 – AI cont’d
22
Compensation in a Personal Context
• (2 other judges found it was OI for reasons we learned
earlier: regular, expected, relied upon, will often be OI)
• But if replacing a capital item (ie compensation for a
change in work contract (Bennett) compensation will
be capital);
• In Bennett (sl #33, wk 2) – compensation for going
from one contract to another with shorter term & less
powers, compensation was capital – because had given
up capital rights under contract, so compensation was
capital as well.
MLC703 Top #2 – AI cont’d
23
Compensation in a Personal Context
Principle in McLaurin’s Case (sl #52, wk 1):
• potentially applies to business & personal compensation
• ONLY an issue if compensated for both inc. and capital
The Principle:
• If compensation is received for BOTH loss of income &
loss of capital, 2 possibilities exist:
i) All of compensation is capital;
ii) The portion of compensation that represents loss of OI
= OI, the balance is capital;
• Whether i) or ii), depends on facts: look at principle in
McLaurin.
MLC703 Top #2 – AI cont’d
24
Compensation in a Personal Context
If compensation is for both OI & capital can only tax
income component as OI if:
• clearly separated into capital and income components;
or:
• Come up some firm way of calculating separate income
& capital components;

• So if have one (or both) of these 2, income component
of compensation = OI
• IF don’t have either, the whole/entire compensation
amount is capital.

MLC703 Top #2 – AI cont’d
25
Compensation in a Personal Context
Eg: Factory burns down & compensation received for
both loss of factory (capital) and loss of profit (income);

If compensation documents state:
• $10,000 for loss of factory (capital), $5,000 for loss of
profit (income);
Then:
• $10,000 would be capital; and $5,000 would be income;
• Why?
• Because income & capital components are clearly
separated, so income component = OI.
MLC703 Top #2 – AI cont’d
26
Compensation in a Personal Context
But if compensation documents state:
• $15,000 for loss of factory & profit (capital & income) ie
an undissected amount that doesn’t state how much
compensation is loss of inc. & how much is loss of capital;
Then:
• None would be income – all would be capital;
• This would apply even if the party paying compensation
had in its own internal documents how much of 15K
was for income & how much for capital – as long as
this wasn’t expressly communicated to the party being
compensated.
MLC703 Top #2 – AI cont’d
27
Revision of Isolated/Extraordinary Transactions
• If a business generates revenue that is normal business
proceeds (eg accounting firm charging for accounting
services) then is OI;
• An Extraordinary transaction will occur when business
generates revenue which is not normal business
proceeds
eg the accounting firm selling its old office;
• An isolated transaction occurs when have once-off
transaction without underlying continuing business
eg retired farmer develops & sells his farm.

28
MLC703 Top #2 – AI cont’d
Revision of Isolated/Extraordinary Transactions
IF have extraordinary/isolated transaction, will only be
OI if comes under at least one of these 3:

i) Whitfords Beach:
• If a transaction is comprehensive/extensive enough eg
don’t just sell old building, knock it down, extensively
develop the land and then sell it, likely to be OI under
principle in Whitfords Beach (though depends on
particular facts).
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MLC703 Top #2 – AI cont’d
Revision of Isolated/Extraordinary Transactions
ii) 1
st
strand of Myer:
• TO fulfil this, need all of the following:
a) Commercial transaction; AND
b) Profit making intention when ENTER transaction.
(If transaction involves sale of an asset, this means
need profit making intention when BUY asset);
c) Must show the way ended up making profit
consistent with how originally intended to make
profit when entered transaction (Westfield)

30
MLC703 Top #2 – AI cont’d
Revision of Isolated/Extraordinary Transactions
iii) 2
nd
strand of Myer (won’t apply often):
• Where you sell right to income, but keep capital
eg you own a rental property, you sell the right to
collect rent for next 3 yrs to a third party in
exchange for a lump sum of $X;
$X would be OI under 2
nd
strand of Myers.
31
MLC703 Top #2 – AI cont’d
Examples: Isolated/Extraordinary transactions
1) Someone buys land for farming, and farms it for 10
yrs. Afterwards, retires from farming; eventually
subdivides land, extensively develops it, builds units on it
and sells them at profit.

• This is an isolated transaction, a once-off transaction
without an underlying continuing business;
• Is it OI?
32
MLC703 Top #2 – AI cont’d
Examples: Isolated/Extraordinary transactions
1) cont’d
• This is an isolated transaction, a once-off transaction
without an underlying continuing business;

• Is it OI?

Whitfords Beach:
• Would probably apply due to extensive development
of the land before selling – but ultimately will depend
on how extensive development was - and the extent
of the TP’s involvement in the development;
33
MLC703 Top #2 – AI cont’d
Examples: Isolated/Extraordinary transactions
1
st
strand of Myer:
i) Commercial transaction? – yes;
ii) Profit intention when entered transaction? - yes,
bought land to profit from it;
iii) Is the way A made profit consistent with original
intention (Westfield)? No – when bought land, had
intention to farm. Ended up profiting from selling
land; because this is not fulfilled, 1
st
strand of Myer
is inapplicable;
2
nd
strand of Myer:
Clearly inapplicable – not selling right to income.
• Would most likely be OI – Whitfords Beach.

34
MLC703 Top #2 – AI cont’d
Examples: Isolated/Extraordinary transactions
2) B owns a clothing store business. This business buys an
investment property with intention to sell it next year at
a profit; then does so.
• An extraordinary transaction; is it OI?
Whitfords Beach: doesn’t apply – no evidence of any
development;
1st Strand of Myer, 3 requirements:
• Commercial transaction – yes;
• Profit making intention when bought (entered) – yes;
• Way made profit consistent with intention? Yes bought
to resell, ended up reselling it;
2nd strand of Myer: inapplicable (not selling right to
inc); would be OI – 1
st
strand of Myer.
35
MLC703 Top #2 – AI cont’d
Examples: Isolated/Extraordinary transactions
3) C buys a house on a big piece of land to live in. After
living in it for 10 yrs, subdivides the land, sells for profit.
• Is it OI?
Whitford Beach? No, said that ‘mere subdivision’ is
insufficient to come under principle in Whitfords Beach;
1
st
Strand of Myer:
• Commercial transaction – arguably yes;
• Profit making intention when entered transaction (ie
bought the land) – no, bought to live in it;
• Way profit made consistent with intention? No.
• Hence, 1
st
strand of Myer inapplicable;
2
nd
strand of Myer: clearly inapplicable;
• Not OI.
36
MLC703 Top #2 – AI cont’d
Final point on Whitfords Beach applicability
NOTE: When extraordinary/isolated transaction is OI
due to the principle in Whitfords Beach, it is the “Net
Profit” (NP) that is assessable;
• Taxable inc. (TI) = assessable inc. (AI) – deductions;

• In a Whitfords transaction, the court said that NP
only (ie gross revenue – costs) will form part of AI;
• This is not the way other types of taxable transaction
would be taxed - in an ordinary transaction, ‘gross
revenue’ would be assessable as AI itself – the TP
could then deduct the costs as ‘deductions’.
37
MLC703 Top #2 – AI cont’d
Final point on Whitfords Beach applicability
eg say, Gr. revenue = $3 million; costs = $1 million.

Usually, in a normal tax assessment situation:
AI = $3m; ded’ns = $1m; thus, TI = AI – ded’ns = $2m

But with a Whitfords Beach transaction:
AI = $2m (NP: Gr. revenue less costs, no further
deductions); not gross revenue – ded’ns;
• TI = $2m.
• The final result with a Whitfords Beach transaction is
the same but the path taken to get there is different.
38
MLC703 Top #2 – AI cont’d
STATUTORY INCOME
• Taxable inc (TI) = assessable inc (AI) – deductions
• AI = OI + SI;
• SI is when a statutory provision states that something
is assessable;
• So if a section(s) of ITAA 1936/1997 says that a gain is
assessable, that gain (by definition) is SI;
• Not all gains that are not OI will be SI; some will be,
some won’t be;
• If a gain isn’t OI and isn’t SI, it will not be assessable;
• We will be reviewing some sections that make gains
into SI.
39
MLC703 Top #2 – AI cont’d
STATUTORY INCOME cont’d
Central Provisions:
• s6-1 ITAA97: OI includes both SI and OI, but if exempt
or non-assessable and non-exempt then will not be AI
(note this section is ‘guide’, not an operative provision);
• s6-10(1) & (2): ITAA97 – SI Included in AI;
What if a gain is potentially both OI and SI?
• Is answered in s6-25 (1) & (2);
• s6-25(1): If an amount is AI more than once, only
include it once - use the more relevant provision;
• To stop someone being taxed twice such a gain is to be
taxed EITHER as OI or SI (unless there is a contrary
intention in the statutory provision - see sl #42);
40
MLC703 Top #2 – AI cont’d
STATUTORY INCOME cont’d
• So the question is, which one will the gain be taxed as –
OI or SI??

The rule is as follows:
• The default rule is that in such an instance the gain is to
be assessable and taxed as SI rather than OI;
ie the ‘default’ rule is this:
• if a gain is BOTH OI and SI, it will still remain as both OI
and SI;
• BUT it will ONLY be assessable and taxed as SI, it won’t
be assessable/taxed as OI – this is to avoid double
taxation.

41
MLC703 Top #2 – AI cont’d
STATUTORY INCOME cont’d
• Sometimes, the above rule won’t apply;
• If the statutory provision that potentially makes the
gain into SI has a 'contrary intention' then the gain will
be taxed as OI rather than as SI – in such an instance it
won’t constitute SI at all, and so won’t be taxed as SI;
• What is a contrary intention? When the statutory
provision that potentially applies makes it clear that it
is only to apply to gains that are not OI.

eg Contrary intention sections: s15-2(3)(d) 1997; s15-20
1997.
42
MLC703 Top #2 – AI cont’d
Some specific statutory provisions:
(that make certain gains into SI)
Dividends:
• Dividends are OI – flow (shares), they are regular, etc;
• They are SI as well – because s44 1936 states they are;
• S 44(1)(a) ITAA36: resident’s AI includes dividends;
• S 44(1)(b) non-resident’s AI includes Aust. source divs;
• s44 has no contrary intention in it;
• So dividends will constitute both OI and SI under s44(1);
• As s44(1) has no contrary intention, it will be assessed &
taxed as SI under s44(1) – because default rule applies
(see sl #41) ie if gain is both OI & SI, is taxed as SI.
43
MLC703 Top #2 – AI cont’d
s15-20 Royalties (statutory)
• Think back to royalties discussed: Royalties = payment
based on usage (sl #1-9, wk 3);
• Royalties are based on exploitation of intellectual
property (eg paid on book sales) – are OI;
• Gave example of royalty that wasn’t OI: eg someone
mines your land, gives you $X/ton of minerals taken;
• This is a capital royalty – is not OI, will be taxable
under s15-20 1997 which states that capital royalties
are assessable;
ie capital royalties are SI;
44
MLC703 Top #2 – AI cont’d
s15-20 Royalties (statutory)
• s15-20 does have a contrary intention – it states that it
doesn’t apply to royalties that are OI;

• This is a contrary intention - it is making it clear that it
only applies to non-OI gains;

• So royalties that are OI will be taxed as OI rather than
under s15-20.
45
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997
• s15-2 ITAA97 - has replaced s26(e) ITAA36;
• s15-2 is more or less the same as the old s26(e) though
there is 1 substantial difference we will discuss later.

Introductory points to s15-2:
• s15-2 aims at making some Personal Services Income
(PSI) assessable;
• Such PSI assessable under s15-2 will, by definition, be
SI - because a section has made it assessable;
46
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
• Since s15-2 only applies to gains from PSI, it will not
apply to property gain;
• It also does not apply to business gains that involve the
sale of goods or don’t involve supply of services.
• So it potentially applies to gains from employment OR
an independent contract for services OR business that
offers services (eg accounting business) OR other
situations where receipt for personal services;
• But it is wider than s6-5 (OI section) for capturing PSI
• In other words, it will capture some personal service
gains that will not be OI;
47
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
• So some gains from PSI that are not OI will be captured
by s15-2 and so will be assessable as SI;
• How is it wider than OI? 2 ways

FIRST:
• s6-5 (section that makes OI assessable) would only
cover PSI which is cash/cash-convertible;
• s15-2 covers both cash/cash-convertible and non-cash
convertible (see s15-2(2));
Cash convertible: book, car, TV;
Non-cash convertible: free meal at a restaurant which
only you can use.
48
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
SECOND:
• s6-5 (section that makes OI assessable) requires nexus
between amount received and services performed
eg in Scott’s case, no nexus, not OI;
• s15-2 still requires a nexus (between what’s received
and services performed);
• However, it requires less of a nexus than s6-5 (OI) - the
nexus test is easier to fulfil (less stringent to satisfy).
49
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
Requirements for s15-2: Let’s look more closely:
• Income will fit under s15-2 if it fulfils all 3 following
requirements:
1) Allowance, Gratuity, Compensation, Benefit, Bonus
and Premium:
• Very Broad, almost anything given by employer (or
other party you provided services to) would fulfil this
requirement;
• This 1st requirement would cover Salaries, bonuses,
and most payments given by employer;
• Would also cover gifts from employer.
50
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
• Allowance = amount that employee can/not spend:
eg - employee gets clothing allowance of $1000, but only
spends $300 on clothes, does not have to return $700
if it is an allowance;
- This is in contrast to a reimbursement, where you
only get back what you actually spend;
- Reimbursements are not covered by s15-2.

• Would also cover gifts from third parties;
• Cash, cash-convertible or non-cash convertible.
51
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
2) Benefit must be ‘provided to’ to TP:
• This requirement is easily fulfilled:
eg if you are given money/property/services, then they
have been ‘provided to you’.

3) Benefit must be in respect of, or for or in relation
directly or indirectly to, any employment of or services
rendered by the TP:
• This element is the Nexus test – as stated earlier, less of
a nexus required than income from services for s6-5;
• However, there is still a nexus required between receipt
and employment/personal services provided.
52
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
• Case which shows the more lenient nexus requirement:
Smith v FCT (1987):
• Employer encouraged employees to undertake uni
studies by giving a monetary incentive;
• For every subject employees successfully completed
they got money. (In those days, uni was free, so
employees could spend it however they liked);
• One employee undertook studies and got money
incentive from employer;
• Was the money received from employer assessable
under old equivalent of s15-2 (ie s26(e) 1936)?
• HELD: Was SI under s26(e) (ie s15-2 1997).
53
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
• Why? Payment was a consequence of employment –
there was a sufficient nexus between incentive received
and services performed;
• A combination of factors indicated a sufficient nexus:
i) incentive was there because employer wanted
employees to be more highly educated (to improve
productivity);
ii) had to be an employee to be eligible for these
payments.
• So court said was nexus between receipt (for studying)
and services as an employee to his employer;
• If s15-2/26(e) did not exist, would this payment have
been OI and so taxable under s6-5?
54
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
• Can’t give definite answer, as court did not consider this;
• BUT is possible that court would have said not OI,
because more difficult to show a sufficient nexus for
something to be assessable as OI than to be assessable
under s15-2;
• So need to show a stronger connection between
receipt and services for OI than for 15-2;
• Although nexus test under s15-2 (and its predecessor) is
more lenient than the nexus test for OI – you still need
to show some reasonable level of nexus between
receipt and services for a gain to be assessable as SI
under s15-2 as follows:
55
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
Payne v FCT (1996):
• TP was employee of KPMG, did lot of work related travel
• Joined Qantas frequent flyer program, received points;
• Converted points to free tickets (non-transferrable);
• Was receipt of these free tickets assessable as OI or SI?
• HELD: No.
• Not OI because not cash/cash-convertible;
• Not SI under s15-2 mainly because of insufficient nexus
between services and receipt of points/ticket.
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MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
Payne v FCT cont’d
• The free ticket was a reward for the TP flying for Qantas,
not the TP’s work as a KPMG employee;
• despite the fact that TP’s flying was in their role as
KPMG employee;
• Since lack of nexus between services & reward, s15-2
didn’t apply.

• So since not OI or SI, not assessable
57
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
Unlike old s26(e), new s15-2 has a contrary intention:
• Why? Makes clear it only applies to gains that are not OI;
• So if a gain is OI it will not be covered (see s15-2(3)(d));

eg Salary is OI.

• Although salary could be potentially caught under s15-2
(benefit, etc provided to TP in respect of their services);
• Because s15-2 has a contrary intention it does not
cover gains that are OI;
• So salary doesn’t fit under and isn’t taxed under s15-2.

58
MLC703 Top #2 – AI cont’d
s15-2 ITAA 1997 cont’d
eg Employee accountant, client gives you gift for your
work – a non-transferrable holiday.
• Not OI (not cash convertible);
• But is SI, assessable under s15-2 because (3 conditions):
– Is gratuity, benefit, etc;
– Provided to the taxpayer;
– Clearly in respect of services as accountant;
• However, as we shall learn later, Fringe Benefits Tax,
takes priority over both OI and s15-2:
ie gains that are subject to FBT provisions are not
assessable as OI or SI to the employee (forget about
this for now – till we learn about FBT).
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MLC703 Top #2 – AI cont’d
Reimbursements & Allowances
• Reimbursement: where repaid for amount already
spent;
eg employee spends $95 on travel expenses for work,
work pays them back for this.

• Not same as allowance – with allowance employee
can keep what haven’t spent eg $95 travel allowance -
if only spend $20 on travel, could keep remaining $75.

• In general, reimbursement not assessable as OI or SI,
as is not a real gain, usually dealt with under FBT.
60
MLC703 Top #2 – AI cont’d
Exempt income
• s6-15(2): exempt income is not included in AI;
• s6-20: When is income exempt? When a section in the
ITAA says so!
• Exempt income = gain that is OI and/or SI but because a
section(s) of an ITAA says it is exempt, then it is not
assessable;
eg Deakin Univ earns fee income – although is OI, as
higher education bodies are exempt, not assessable
– exempt income because legislation says higher
education body receipts are exempt.
61
MLC703 Top #2 – AI cont’d
Exempt income cont’d
How to find out if an Item is Exempt income? 2 steps:
i) Look up Div 11 ITAA97 to find relevant section;
ii) Go to relevant section & see if the gain is exempt.
First Step
• Div 11 ITAA97 is like an index for exempt inc. Look up
categories and it will refer you to the relevant section.
2 categories:
i) s11-5: Is an index for Exempt entities - an entity
whose income is exempt no matter what the income is:
• eg charity, some sporting clubs, universities, etc.
ii) s11-15: Is an index for Income that is exempt:
• eg Defence force pay for members of army reserve.
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MLC703 Top #2 – AI cont’d
Exempt income cont’d
Second Step:
• Look up the section that Div 11 refers to and see if it
makes the item exempt.

Example of how to use:
• Is a non-profit private hospital exempt?
i) Firstly look up div 11, s11-5 exempt entities:
• under ‘Health’, ‘hospital’: will refer you to s50-30;
ii) Secondly, look up s50-30, Item 6.2 will tell you that
such a hospital is exempt (may also refer to further
sections for clarification).
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MLC703 Top #2 – AI cont’d
Non-assessable, non-exempt (NANE) income
• s6-15(3) 1997: NANE income is not included in AI.
• s6-23: When is income NANE? When the ITAA says so!
• s11-55 has a list of NANE provisions;
• What’s the difference between income that is exempt
by legislation and what legislation says is NANE? Will
become clearer when we do deductions.
• But similar concept – something that is ordinary and/or
SI, but legislation says not assessable.
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MLC703 Top #2 – AI cont’d
Superannuation (Super)
A form of compulsory retirement savings:
• Employer must pay an amount equal to 9.25% of an
employee’s salary into a super account;
• This 9.25% amount is paid in addition to the salary;
• The employee can access this only when they reach
retiring age (some exceptions);

eg employee A with salary of $50K: employer must put
$4,625 into A’s super account. Deposits into super
accounts are taxed in the hands of the super fund (SI);

65
MLC703 Top #2 – AI cont’d
Super cont’d
• As mentioned earlier, if employee wants more money
in their super they can ‘salary sacrifice’ some pay;

eg $80K salary: ask employer to pay $70K salary & put
10K into super – that 10K will not be part of OI as long
as this arrangement is entered into before earning it.

• Employee can also salary sacrifice into other things,
such as employer paying for car for your own use,
again, must be done prior to earning the money.

66
MLC703 Top #2 – AI cont’d
TOPIC 3: CAPITAL GAINS TAX (CGT)
TI = AI – Deductions

• AI is a combination of OI and SI;
• CGT is a tax that makes many CGs into SI & therefore
assessable;
• Many gains which are not OI due to being ‘capital’ will
be caught under CGT provisions;

• Most common – purchase & sale at profit;
eg buy house for $100K to rent out; sell at $200K.
• For most TPs, this gain would be capital and so not OI;
67
MLC703 Top #3 – CGT
CGT cont’d
• BUT as we shall see this event would be caught by CGT;
• Since it’s made assessable by CGT, it’s a type of SI and
thus, it is AI;
• NOTE: CGT only applies to:
• realized gains – buy house for $100K, now worth 400K,
but don’t sell it – won’t have to pay CGT (yet);
• assets bought on/after 20/9/85 (date CGT introduced);
eg bought shares for $10,000 in 1984, sell now for
$200,000, won’t have to pay CGT;
• Assets bought before 20/9/85 are commonly referred
to as pre-85 assets or pre-CGT assets.
68
MLC703 Top #3 – CGT cont’d
CGT cont’d
• CENTRAL PROVISIONS: All CGT provisions in ITAA97;
• TI = AI – deductions;
• s102-5: Net Capital gain (NCG) is part of AI;
• What is NCG?
• s102-10: NCG = CG – Capital Loss;
Note: it’s more complex than this but for now we’ll keep
it simple.
eg CG of $100K on sale of house, and Cap. loss of $60K
on Telstra shares;
• NCG = $40K (100K – 60K);
• So $40,000 is added to TP’s AI.
69
MLC703 Top #3 – CGT cont’d
CGT cont’d
What if have a Net Capital Loss (NCL)?
• If we have greater Cap. losses than CGs will have a NCL
• Although NCG is added to AI, NCL is not a deduction;
• So a NCG increases TI, but NCL does not decrease TI;
eg Made a Cap. Loss of $60K (sale of Telstra shares) - in
that year, had a capital loss of $60K and no CGs);
• OI of $40,000 (salary); thus AI = $40,000;
• TI = AI – deductions (now, assuming no deductions)
• TI = $40,000; not reduced by having NCL (s102-10: CLs
can only be offset against CGs);
• So a Net CG raises your TI, but Net CL doesn’t reduce
your TI.
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MLC703 Top #3 – CGT cont’d
CGT cont’d
What if have a NCL? cont’d
• This means in substance that capital losses are
quarantined – they can only be used to offset CGs, not
other types of AI;
• However, a NCL can offset later NCGs - you can
carry forward a NCL;
• So first year, made NCL of $60K; if next year make
$110K Net CG from sale of NAB shares, then CG will be
reduced to $50K from previous year’s NCL of $60K;
• No time limit on carrying forward Net Capital Losses.
71
MLC703 Top #3 – CGT cont’d
CGT events
• s102-20: a CG or CL will only occur if a TP ‘triggers’
a CGT Event;
• s104-5: is a TABLE with every CGT event listed. For
each event states:
– Name (of CGT event);
– How to calculate the CG or CL;
– Timing of event;
– Section to go to for further detailed information.

72
MLC703 Top #3 – CGT cont’d
CGT events cont’d
We only have to know a few CGT events:
s104-10: CGT Event A1 (Disposal of CGT Asset)
• This is the most common CGT Event;
eg sale of house/shares at a profit;
• s104-10(1): Event A1 happens if dispose of CGT Asset;

Need 2 things for Event A1:
• Disposal; and
• a CGT Asset.
73
MLC703 Top #3 – CGT cont’d
CGT events cont’d
a) Disposal:
• 104-10(2): Dispose of asset when change of ownership
• This would include a sale;
• Also includes giving something away;
• So is possible that if TP gifts shares, house, etc, the
donor will have to pay CGT;
• If property compulsorily acquired - is also a disposal;
b) CGT Asset:
• Defined in s108-5:
1) Property; or
2) Legal/equitable right that is not property
74
MLC703 Top #3 – CGT cont’d
CGT events cont’d
1) Property:
• Includes tangible items such as:
– Home
– Skateboard
– Television
• Also intangible items like:
– Patent
– Trademarks
– Goodwill
• For something to be property, it usually needs to be
transferable;
• If something is not transferable, then usually will not
be property (personal rights).
75
MLC703 Top #3 – CGT cont’d
CGT events cont’d
Examples:
• Rights under a contract of employment – you are
employed as an accountant, can’t transfer your right to
be employed to someone else;
• So it is not property because it is not transferable;

• Right to compensation - you are injured at work, you
have the right to sue employer;
• You can’t sell this right, so it’s not property.
76
MLC703 Top #3 – CGT cont’d
CGT events cont’d
2) Legal/equitable right that is not property:
• Would cover above 2 examples ie rights under a
contract of employment or right to compensation;
• Although they are not property (because not
transferable) they are still legal/equitable right – so
they are still considered CGT Assets;

NOTE: ‘popular rights’ are not CGT Assets; this
includes things that everyone is entitled to, such as
right to a safe work environment; right to education;
right to breathe free air.
77
MLC703 Top #3 – CGT cont’d