Assessable Income exam notes PDF

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ASSESSABLE INCOME

OVERVIEW / ORDER OF NOTES (AND ANSWERS) *underlined = TOPIC Intro topics Income tax overview GST  

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Taxable supply OR importation? Exceptions: o GST-free supplies o Input taxed supplies IF GST payable  can TP claim ITCs? o Creditable purpose? Adjustments? Turnover threshold

ASSESSABLE INCOME  Exclusions o Exempt o Non-assessable non-exempt income  MAIN: GST on a taxable supply  Ordinary income o Settled forms of ‘Income’ o CL response  What is the gain?  Can include non-cash gains / non-cash business benefits  Mode of acquisition  Income from personal exertion  Income from business  Income from profit-making scheme  Income from property  Statutory income o Capital Gains Tax  (1) offsetting capital gains from capital losses  A1: disposal of CGT asset  C2: cancellation (TP no longer owner)  G1: capital payment for shares (TP still owner)  (2) offsetting remains CGs from ‘net capital losses’ from earlier years  (3) discount rule  (4) small business concessions  (5) remaining CGs = net capital gains / remaining CLs = offset in future years (not deductible) DEDUCTIONS  Exclusions o Provisions that deny or limit deductions  MAIN: can’t claim ITCs or decreasing adjustments  Requirements to claim  substantiation  Specifically not deductible  E.g. on income tax, GST, ITCs, Decreasing adjustments, SA (employer  Entertainment expenses  Non-compulsory uniforms  Non-commercial business losses  General deductions o Loss OR outgoing? o Specific expenses  Clothing expenses

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ASSESSABLE INCOME

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 Travel expenses  Self-education expenses  Home office expenses  Rent and licence fees  Interest expenses  Legal expenses  Management expenses o General expenses  +ve limbs  Gaining/producing TPs assessable income  Carrying on TPs business  -ve limbs  Capital expenditure  Private or domestic nature  Gaining exempt income or non-assessable non-exempt income  Specifically denied deductions Specific deductions

CAPITAL WRITE-OFFS AND ALLOWANCES  Balancing adjustments (sale of depreciating assets) o Either SPECIFIC DEDUCTION or STATUTORY INCOME  ‘Blackhole’ capital expenditure (acquisition of non-DA) o SPECIFIC DEDUCTION  Capital works regime (construction expenditure, income producing purposes) o SPECIFIC DEDUCTION TRADING STOCK  Expenditure incurred in purchasing trading stock when ‘on hand’  DEDUCTIBLE  Disposal of trading stock  ASSESSABLE  Acquisition of trading stock  DEDUCTIBLE  Accounting for trading stock at hand at end of FY  ASSESSABLE or DEDUCTIBLE COMPANIES  CGT Event A1 o Selling of shares (property) falls within scope  GO TO (Statutory income) CGT NOTES for A1  CGT Event C2 o Ownership of shares ends by cancellation (NOT selling)  CGT Event G1 o Comp makes payment to SH that isn’t A1, C2 or dividend i.e. no end/cancellation  Dividends o Franked portion will be assessable and also allow for a tax offset SUPERANNUATION  Contributions phase (contributions made to the TPs super) o Types of contributions  Employer contributions for employees (subdiv 290-B)  Personal contributions  With notice of intention to claim deductions (subdiv 290-C)  Without notice of intention to claim deductions  Spouse contributions (subdiv 290-D)  Government co-contributions o Excess contributions  Actual contributions vs Caps o Div 293 tax (TP earns above $250,000)  Investment phase (funds invested by SF, stage where SF is taxed at with lower rates)  Benefits phase (SF paying lump sums or pensions to members or members’ dependents upon death)

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EXEMPT or NON-ASSESSABLE NON-EXEMPT INCOME (CHAP 12) Certain amounts are excluded from one’s assessable income, classified exempt OR non-assessable non-exempt income (s 6-15 ITAA97) So far in box S 17-5 (GST on a taxable supply)  KEY ONE s 128D ITAA1936  Companies (certain income not assessable)  Income …to which section 128B applies … upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga) … be payable, is not assessable income and is not exempt income of a person.  Has the effect of exempting dividends that would be subject to withholding tax if they were not franked S 295-170 ITAA97  Superannuation that is a government co-contribution OR for the benefit of a person under 18 that isn’t made by or on behald of the person’s employer S 303-15 ITAA97  Excess concessional SA contribution chosen to be released) S 303-17 ITAA 97  ‘A * superannuation benefit is not assessable income and is not * exempt income if it is paid to you in response to a release authority issued under section 96-12 in Schedule 1 to the Taxation Administration Act 1953’ S 768-5  Dividends from foreign comps to resident comps with participation interests of at least 10% S 23AI, AK  Dividends paid to resident SH out of income that has been previously attributed to the SH

EXEMPT INCOME Ordinary or statutory income is made exempt income by certain provisions of ITAA36, ITAA97 or another Cth law Checklist Subdiv 11-A The income will be exempt either because:  It is derived from a certain entity  It is a specific kind of income CERTAIN ENTITIES Charitable institutions (s 50-5) Religious institutions (s 50-5) Scientific institutions (s 50-5) Public educational institutions (s50-10) Employee and employer associations (s50-15) Municipal corporations and local governing bodies (s50-25) Public hospitals (s50-30) Sports, musical and art societies and clubs (s50-45)

SPECIFIC KINDS OF INCOME Exempt benefits under the Fringe Benefit Tax (s 23L(1A) 36)  FB = extra benefit supplementing an employee's money wage or salary, for example a company car, private health care 3

ASSESSABLE INCOME Non-cash business benefits that do not exceed $300 (s23L(2) 36) PDF dividends (s124ZM 36) Interest on a judgment debt for personal injuries (s51-57) Foreign earnings derived by residents from eligible foreign service for a continuous period of not less than 91 days (s23AG 36) Allowances received by members of the defence force (s51-5) Scholarships and educational allowances paid to full-time students (s51-10 ) Income from eligible venture capital investments (s 51-52 and s 51-54) Certain social security and veterans payments (Div 52 ITAA97)

NON-ASSESSABLE NON-EXEMPT INCOME Ordinary or statutory income is made non-assessable non-exempt income by certain provisions of ITAA36, ITAA97 or another Cth law (s 6-23 ITAA 97) Checklist Subdiv 11-B Examples of non-assessable non-exempt income  GST on a taxable supply (s 17-5)  Income that is a fringe benefit  Certain superannuation benefits  Tax-free component of an ETP  Genuine redundancy payments  Certain foreign non-portfolio dividends  Amounts subject to withholding tax

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ORDINARY INCOME (CHAP 10) SETTLED FORMS OF INCOME Settled forms of income:  Rent from a lease (Adelaide Fruit)  Interest from a loan (Westminster Bank; s 6-10)  Royalties from a licence  Dividends from shares  Salary or wages from employment (Dean & Anor) Facts Issue Takeover of company, to ensure key Whether employees stayed… payment was They were offered a one-off retention assessable? payments to stay in company for 12 months

Held It was INCOME Although was one-off, usually indicative of capital, Court construed that this constituted his salary and wages  remuneration for services rendered

CL RESPONSE Only income receipts are assessable, to be distinguished from capital receipts (1) GAIN? Income is measured by gains that are realised/crystallise (Tennant v Smith), thus on facts ______ Distinguishing between income (the fruit, returns from the capital asset) and capital (the tree)

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Examples for distinguishing: o INCOME: rent / CAPITAL: land that is rented o INCOME: shares / CAPITAL: dividends

If consideration isn’t cash i.e. gives fruit in exchange for sunglasses  Income is measured the considerations ‘money value’ (s 21(1) ITAA36)  If not convertible to cash, treated as if it were (s 21A(1) ITAA36), ‘non-cash business benefit’ o Developed in response to cases like Cooke  Manufacturer provides retailer a holiday as consideration, h/e holiday can’t be transferred to anyone else  HELD: not income o S 21A(5) ITAA36 indicates that a non-cash business benefit ‘means property or services provided after 31 August 1988:  (a) wholly or partly in respect of a business relationship; or  (b) wholly or partly for or in relation directly or indirectly to a business relationship.’  IN EXAM: _____ falls under s 21A(5)(a) / (b) as it is …. o The amount is brought to account by: 5

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ASSESSABLE INCOME its ‘arm’s length value reduced by the recipient’s contribution (if any)’ (s 21A(2)(a)) and   (5)(a) the amount that the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider under a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction; or  disregarding conditions prevent conversion (s 21A(2)(b)) Value is reduced to the extent that:  Recipient would otherwise be entitled to deduction  (4)(b) It is 'non-deductible entertainment expenditure' Income is exempt where total non-cash business benefits for the year does not exceed $300

(2) MODE OF ACQUISITION X will argue that [E.G. the profit from the sale] falls under one of the categories of ordinary income and thus is ordinary income, which is given meaning by the CL per s6-5. GENERAL RULES (if doesn’t fall into one category, draw from cases within each)  Income is characterised based on its quality in the hands of the recipient ( McNeil)  [IN EXAM: how is the recipient using it? ]  Factors pointing towards it being ‘income’ o Recurrence, regularity and periodicity (Keily, Inkster)  Also considered in Blake cf Harris  Exception  regular instalments for capital asset  Foly v Fletcher o Paid off house in instalments; h/e instalments received didn’t constitute the receivers income as was ultimately paid for a capital transaction (the house) o Continuing expectation of receipt (Blake) o Profit-making objective (Myer Emporium Ltd)  Mere saving of expenditure is not ordinarily income, except where it arises in the ordinary course of business (Unilever) OVERVIEW: 1. Income from personal exertion a. Rewards for services and payments incidental to employment b. BUT NOT gifts or payments for relinquishing or restricting rights 2. Income from business a. Ordinary proceeds of a business and profits from trading transactions b. BUT NOT gains from the mere realisation of capital assets 3. Income from profit-making scheme a. Profits from isolated transactions entered into with the purpose of making a profit 4. Income from property a. Flows from the use of capital assets b. BUT NOT gains accruing to capital assets

(1) INCOME FROM PERSONAL EXERTION Roadmap A. Rewards for services (YES) B. Voluntary payments that relate to professional activities (MAYBE) C. Payments that are incidental to employment (MAYBE) D. Payments that are a substitute for salary (YES) E. Payments that are personal gifts (NO) F. Payments for relinquishing rights (NO) G. Payments for entering into restrictive covenants (NO) 6

ASSESSABLE INCOME A – Rewards for services are generally income  E.g. Brent; wife of train-robber was interviewed, paid by interviewee, this was income Facts Wife of train-robber (Brent) was interviewed by journalists Used her answers to publish article Brent paid for providing the service (NB: not an employee, not salary/wage)

Issue Whether grant was assessable?

Held It was INCOME Paid for her services Couldn’t claim copyright on stories you tell Mere expression isn’t protectable

B- Voluntary payments (from the employee or not; Calvert) related to professional activities may be income so long as they have a sufficient connection with the recipient’s income earning activities (Calvert; Moorhouse)  LOOK FOR: o Incidence with employment  Calvert v Wainwright (1947) o Apply for TIPPING cases  INCOME Facts Taxi driver receives fares, but also TIPS Passengers under no obligation to pay tips

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Held Tips were income as they were ‘sufficiently incidental Related to employment Remuneration for services rendered  Income doesn’t have to paid by employer

Moorhouse v Dooland [1955] o Cricketer paid extra for ‘meritorious performances’, as sourced from crowd  sufficiently incidental to his employment  INCOME o C.f. personal gists as in Seymour (to mark retirement) Facts Cricket player K with club… if played well, they collected money from club and was paid out with that

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Issue Was this assessable income?

Issue Was this assessable income?

Held It was INCOME Similar principles followed as in Calvert Link with employment-related activities

Dean & Anor; one-off payment to stay in company was assessable as constituted salary, being incidental to their professional services rendered, no other obligation to otherwise be paid  INCOME

C- Payments made by third parties that are ‘incidental’ to employment/ordinary course of business may be income  LOOK FOR: o When employment places individual in position to receive this external payment  Kelly o When payment (award or prize) doesn’t accrue from official profession, BUT TP can be held to be carrying on a business in this sphere  ordinary business receipt  Stone  Kelly (WASC) o Footy player receives cash award from Channel 7 for being B&F  INCOME Facts Footy player up in WA league Received B&F award from channel 7 (paid for sponsorship, advertising) - $20 000 Argued payment was made not by employer Also that he had no idea he’d receive it Did nothing for channel 7

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Issue Was the award assessable?

Held It was assessable Franklyn J, received in pursuit of his career as a professional footballer Also his playing with club ‘caused’ the payment as allowed him to play professional football, making him eligible

Stone (2005) ATC 4234 o Although not his primary profession, Stone was carrying on a business as a javelin thrower, with all receips assessable 7

ASSESSABLE INCOME Facts Professional police officer; also javelin thrower (at a professional level, but not their primary profession) Received sponsorship, payments  used these to fund competitions Argued the use of money was to become the best at her sport

Issue Were the sponsorship grants etc assessable?

Held In business of being professional athlete and was assessable on these amounts (sponsorship and payments) Regular appearances on radio or television  becomes an income-producing activity [3-5] INCOME

D- Payments that substitute or supplement income may constitute income (Fullagar J in Dixon), so long as it is ‘really incidental to an employment’ (Dixon CJ and Williams J in Dixon at 556)  Dixon (1952) 86 CLR 540 o Supplementary payments from former civilian employer to 'make up' difference between civilian and military wage o i.e. beefed up military wage to match civilian wage Facts Taxpayer worked for civilian employer WWII began Employer said that if they joined army, he’d make up difference b/w civilian and military pay Dixon argued he performed a service for civilian employer

Issue Make-up payments to Dixon assessable?

Held It was INCOME Fullagar J  substitute for income Dixon and Williams  taxpayer able to enlist with ‘expectation’ that he could depend on receiving wages that were not less than the wages he would’ve made as a civilian Found it unimportant whether payment comes from ‘employer or somebody else’ so long as ‘really incidental to an employment’ [556]

E- Personal gifts, or payments that are traced to some personal relationship between the payer and the recipient, are generally not income  Hayes o Receipt of shares by an accountant from a friend who was his former employer weren’t assessable Facts Richardson formed company Taxpayer worked as accountant Since had become friends Employment ceased Later gifted shares to Hayes

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Held Here, gifts were personal in nature  CAPITAL Taxpayer had been adequately remunerated for his services, but not for ‘informal advice’ regarding ‘trifling matters’ Couldn’t trace to specific income-producing professional services

Money received by a solicitor from a former client as a personal gift, wasn’t assessable Not assessable where ‘generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered’ (Windeyer J at 526)

Facts Sol worked for family and their estate After already been paid as solicitor, widow then made ‘gratuitous payment’ of 10K for help

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Issue Assessable value?

Issue Was the payment assessable?

Held Found that payment was a gift  CAPITAL Personal r/ship b/w parties Already paid for professional Couldn’t trace

Leaves room for alternative  if still employed by them, more like Dean & Anor

F- Payments for relinquishing rights are usually capital (Jorrold v Boustead UK; Pritchard UK, severing employment)  Jarrold o Payments received by rugby players for giving up their amateur status were held to be capital o Distinguished from payments for playing in a match (income) from ‘signing-on’ fees for giving up a ‘permanent advantage’ (capital) (Lord Denning MR) 8

ASSESSABLE INCOME G- Payments for entering into restrictive covenants are usually capital (Higgs v Olivier; Woite)  Higgs (Inspector of Taxes) v Olivier [1951] Facts Oliver was actor; latest film was Henry V Wasn’t doing well, wanted to drum-up hype Comp said they’d pay him sum of money to agree NOT TO ACT for a period of 18 months Paid 15K pounds

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Issue Was the 15K assessable?

Held Capital nature  NOT assessable Wasn’t being paid to act in film; but to give up his right to act in any other film (that was his profession otherwise)

Woite o Like Olivier  giving up enduring rights Facts Footy player, playing in SA Paid 10K to sign agreement with NM Club (if he ever came to Vic, he would only play for NM)

Issue

Held (Mitchell J) Capital receipt Considered that if it had bound him to play, would’ve been different result Here, payment was agreement not to play for any club but NM (not binding him to play) Not incidental to his ability to play in SA

(2) INCOME FROM BUSINESS N.B: Gross basis  Gains are assessable and expenses may be separately deductible FCT will argue that [E.G. the profit from the sale] constitutes income from a business, based on the fact that the profit:  Flows from the ‘carrying on, or carrying out, of a business’ i.e. ordinary proceeds of business (Californian Copper)  Is the result of a speculation (Californian Copper) X will argue that they are a mere investor accruing capital, rendering the profits non-assessable TEST (Californian Copper)  Mere investors  capital gains o Realisation of ordinary investment  Carrying on a business/speculators  income gains o Arising from ‘trading transactions’/’business’ (HERE) and ‘profit-making schemes’ (see 3) N.B: difficult to differentiate between ‘mere investor’ and ‘carrying on a business’ CAPITAL Mere investor/realization of capital asset Scottish Australian Mining Co indicates that gains arising from the mere realization of a capital asset are generally capital, so long as they are not venturing assets in a trading activity (see B below, Whitfords Beach)  Ruhamah  comp deriving rent for nine years, later sale of property o HELD: profit was capital nature, outside scope of trade (Knox Cj, Gavan Duffy, Powers and Starke JJ at 154)  Scottish Aus Mining Co (1950) o Revisited Ruhamah Facts Purchases huge land; TP mined for coal TP fo...