Final Template Taxation Law 192 Q copy PDF

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11 – TAXABLE INCOMEIncome tax amount based off the taxable income from the income year: s 4– 10 S4-10(2) – companies income year previous financial year TY= AY – AD: s 4– 15 S995-1 – income tax defined as tax imposed by any of the listed acts2 – RESIDENCEs 6– 5(2) If the individual is an Australian ...

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DOMICILE TEST

1 – TAXABLE INCOME Income tax amount based off the taxable income from the income year: s 4–10 S4-10(2) – companies income year previous financial year TY= AY – AD: s 4–15 S995-1 – income tax defined as tax imposed by any of the listed acts

2 – RESIDENCE s 6– 5(2) If the individual is an Australian resident, then they are taxed on income derived from all sources s 6–5 (3) If the individual is not an Australian resident (foreign resident), then they are taxed on income derived only from sources in Australia S995-1 ITAA97 refers back to s 6(1) ITAA36 – statutory provisions for residence and order TR 98/17 – commissioner accepts that taxpayers will be treated as residents only for the period after their migration COMMON LAW TEST Applies for both R → NR and NR → R Question of fact and degree not a question of law. Some elem elements ents tto o be bala balanced nced (look at posi positiv tiv tives es and negat negative ive ives) s) 1. physical presence in Australia; 2. frequency, regularity, purpose and duration of visits; 3. maintenance of a home in Australia during absences; 4. family and business ties in a particular country; o note business ties not always important ( IR Commrs v Lysaght) 5. present habits and way of life; and 6. nationality – only important in borderline cases. TR98/17 – general rule of at least 6 months in Aus for residency Cases Levene v IRC: Monaco, came back regularly, held he was a resident based on fact and degree. Had he taken out lease earlier, would have been g. Lysaght v IRC: Moved to Ireland, didn’t have house in UK, came back for a week a month and stayed in hotels. Claimed not regular, court held that he was a resident, but weren’t happy about the law. Cooper v Cadwadaler: Barrister, always had access to property. Held was a resident as he could always go there. 1 Q-stick is the goat

R→ →NR 1. 2.

s 6(1)(a)(i) Eleme Elements nts Person has a domicile in Australia Person does not have a permanent place of abode outside Australia

Factors to consider when determining if permanent place of abode outside Australia • Intention as to length of stay; • Nature and quality of use made of place of abode; • Actual length of stay; • Duration and continuity of • Abandonment of place of abode presence in place; and in Australia; • Durability of association (ties) • Acquisition of place of abode with place. outside Australia; • Intention to make place of abode 'home'; Cases Applegate v FCT: Lawyer went overseas, set up place of permanent residence as he anticipated on staying there for a time more than “temporary or transitory” Jenkins v FCT: Left Aus, bank rented house as he couldn’t sell, planned to go for 3 years, came back after 18 months. Can have a permanent place of abode even if intention to return at a certain point. Harding v Commissioner of Taxation: Lived 17 of last 20 years in 2 countries overseas. Full federal court held that place can be town or country, need not be a particular home. Comissioners View: IT 2650 More than 2 years - Generally a substantial period and will have a permanent place of abode overseas. Less than 2 years -n Considered transitory and will not have a permanent place of abode overseas

183 DAY RULE NR → R

3 – IF NOT A RESIDENT, LOOK AT SOURCE OF INCOME s 6(1)(a)(ii)

Eleme Elements nts 1. Must be in Australia more than ½ of the year (183 days) (184 in leap year) UNLESS Commissioner satisfied: 2. usual place of abode outside Australia; and 3. does not intend to take up residence. Note: 183 days may be intermittent • If the taxpayer has no permanent place of abode in Australia, they do not necessarily have to have a usual place of abode elsewhere – FCT v Subrahmanyam • TR 98/17 – treated as residents only after migration – commissioner SUPERANNUATION TEST R → NR 1. 2. 3.

s 6(1)(a)(iii) Eleme Elements nts Member of Superannuation scheme est. by deed under the Superannuation Act 1990; or An eligible employee for the purposes of the Superannuation Act 1976; or The spouse, or child under 16 covered by points 1 and 2 above.

Baker v FCT: Taxpayer who has ceased to reside in Australia but was still a member of a relevant superannuation fund is a resident even if they cease to contribute to the fund. TEMPORARY RESIDENTS S995-1, temp resident i (a) temporary visa granted under the Migration Act 1958; and (b not an Australian resident within Social Security Act 1991; and (c) your *spouse is not an Australian resident within Social Security Act 1991. Broadly, Subdiv 768-R provides a tax exemption to temporary residents for: 1. All ordinary & statutory income derived from a foreign source (foreign source income exemption – s768-910) 2. Capital gains & capital losses made on assets that are not taxable Australian property (capital gains exemption – s 768-915) 3. Interest withholding obligations associated with amounts owing to foreign lenders (interest withholding tax exemption – s 768-980).

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Source only significant if non-resident s 6–5(3) and s 6-10(5) Defn in s995-1 – has aus source if derived from source in Aus for ITAA36 Nathan’s Case: the ascertainment of the actual source of a given income is a practical, hard matter of fact. TR 2013/1: commissioner says he will take substance over form approach IS IT INCOME s 6 – 5: Outlines rules regarding income source Dixon’s Case: Salary is income if it is periodic, recurrent, regular and in return for services. See income below IDENTIFY CATEGORY OF INCOME SALARY AND WAGES What could affect the source Ct v Cam and Sons Contract – the place where the contract is entered into Performance – the place where the contract was performed (Generally look at this, exception where performance occur anywhere) Payment – The place where the payment is made Generally the performance of the service is the most important factor – EXCEPT - If … creative powers or special knowledge is involved to such a high degree that the place where those powers or knowledge are utilised is relatively unimportant, the dominant source may be the place where the contract was made (Mitchum) CT v Cam and So ns Men employed on trawlers, travelled outside Australia while performing contract, entered into k in NSW and they were paid in NSW, wages paid to employees were apportioned based on where the performance occurred. FCT v Mitchum Entered into k for Swiss company in Switzerland, said would give entire time and talent to company, just had to be at disposal of company, so dominant factor in this k is not location of performance, as performance could have been done anywhere. Evans v FCT Academic in Switzerland, sabbatical, got paid from Australia. In this case, still employed in Australia, location of payment more significant than performance.

FINANCIAL TRANSACTIONS Question of fact - Courts seek to find where the economic activity giving rise to the income had occurred – looking at the substance of the arrangement as opposed to the form Thorpe Nominees v FCT Taxpayer tried to shift part of income to Switzerland to minimise tax liability. Court looked at substance of the transaction over the form and saw that the transaction took place between two residents over an Australian property and held that the economic activity which gave rise to the income had occurred in Australia.

Esquire Nominees v FCT EQ, a Norfolk Island company received dividends from a shareholding in another Norfolk Island Company, MC. Ultimately flowed from shareholding in an Australian company. EQ sourced dividends from foreign source therefore, not taxable. - Source is not location of the share register, but where the company paying dividend made profit of which dividend had been paid. CAPITAL GAINS TAX  On or after 12 December 2006 – foreign resident’s liability for CGT = based on whether the asset is TAXABLE AUSTRALIAN PROPERTY (eg taxable Australian real property)  Before 12 December 2006 – liability based on whether the asset had the NECESSARY CONNECTION WITH AUSTRALIA – more onerous.

BUSINESS INCOME The source of business or trading profits is generally determined by reference to the place where the trading activities take place. SALE OF REAL ESTATE

4 - DERIVATION OF INCOME .

No authority directly on point, immovable nature of real estate means location of the property determines source Rhodesia Metals v C of T Tax payer was English company, acquired mining claims in Rhodesia through a k signed in England, Sold claims in a k in England. Supposed that R purchased claims to sell for profits. R claimed it was capital and sourced in England. Held it was income because purpose was to sell for profits and because location of mining claims was in Rhodesia, then source was Rhodesia as K could have been signed anywhere and Payment could have been made anywhere.

DERIVATION • • • •

INTEREST

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Generally, consider the place of the contract and where the money was lent. FCT v Spotless Services Events occurred in the Cook Island, Interest paid to Australian resident company by a Cook Islands bank on funds deposited against a certificate of deposit by a bank in the Cook Islands. Deposit preceded and dependant on a security from Australia in the form of a letter of credit. Held interest was key and source was Cook Islands, though interest taxed for tax avoidance.

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DIVIDENDS s 44(1) of ITAA36: Source is determined by the source of the profits out of which the dividend has been paid. Source is a question of fact in each case 3 Q-stick is the goat

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s 6-5(2) includes in your assessable income the ordinary income which has been derived during the income year s 6-5(4) you are taken to have received amount as soon as it is applied/dealt with on your behalf Derivation tells us what period income should be included in (timing) Two methods of accounting for income: o Cash receipts method o Accruals basis Cash basis – receipt may be either: o Actual ▪ Money actually received o Constructive ▪ Someone handles the money on your behalf There is only one correct method applicable to each taxpayer With the cash/receipts method, income is derived when it is received. With the accruals method, income is derived as it is earned, i.e. when you can enforce payment of the debt. Important note – if a change in methods allows firm to remove a significant portion of the income, as a result of changing from the cash (taxable when given) to accrual (taxable when earned) is not taxable. Ie. If they had not received the money it cannot be taxed under the cash methods, and then cannot be taxed under the accrual method as it had not derived in that year. (Hendersons)

INCOME FROM TRADING J Rowe & Son v FCT For taxation as well as business purposes the income of a business is derived when it is earned, and the receipt of what is earned is not necessary to bring the proceeds of sale into account. REMUNERATION FOR PERSONAL EXERTION TR 98/1 – Analyse each case on its own considering the following factors Employees • Where there are few employees and the level of profit attributable to the employees is low, relative to the profit attributable to the principal, then cash basis likely. Trading stock • If the sale of trading stock is only incidental to services, cash basis accounting will be accepted. Cash or credit sales • With cash, income will be recognised at a similar time under either system. With a business who does mostly credit transactions, accruals will be most appropriate Capital equipment • Not so much to do with personal services therefore accruals, however, consider if special skills required to operate equipment and consider cash basis. Reliance on circulating capital or consumables • If majority of business income can be traced to consumables – then it is accrual – however if the use of consumable is incidental to the business (ie. designer) then it is cash. Cases: Carden’s Case: Used cash basis until 30 June 1935. Died in late 1935. If cash basis, money would not be taxed, so commissioner wanted it to be accruals. Court held he didn’t have stock on hand and his business was not in trading stock and instead, was rewarded for his professional skill and therefore, cash basis Brent’s Case: Taxpayer was wife of famous criminal. Sold rights to life story. Payment of over $60,000 due but had only received $10,000 by EOFY. Court held no need for income to be taxed all in one go and it was a return for her personal service, so cash bas is.

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Henderson v FCT Accountancy practice with 295 employees, of which 150 were accountants. They had fees of over $1 million and bad debts of $98. Firm changed from cash to accruals. Held this was the right thing to do as lots of employees with significant credit owed. FCT v Firstenberg Sole practitioner with one employee, who was a secretary. Rightfully worked on a cash basis. FCT v Dunn Sole practitioner – with a few employees mostly family, he was the only qualified accountant. In this case, distinguished Henderson and followed Fistenberg. Barratt & Ors v FCT Partners in a pathology practice who employed heaps of people, most income sourced not from Partners, but employees. Therefore, accruals. PAYMENTS IN ADVANCE Can’t be taxed on money until you have ‘earned it’, therefore if liable to pay back exempt Arthur Murray v FCT Taxpayer provided dance lessons, received payment in advance. No refund policy though refunds were sometimes given. Money was only paid into employee accounts when money was earned. Court held fees were received in advance only became income when earned.

5 - ASSESSABLE INCOME

3. MUST BE RECEIVED AS INCOME

What is income - Income, “must be determined in accordance with the ordinary concepts and usages of mankind” (Scott v FCT) Realised Gains are income Difference between income and capital – Capital being likened to the tree or land, income to the fruit or crop; the Capital being depicted as a reservoir supplied from springs, the income as the outlet stream, to be measured by its flow during a period of time.” (Pitney J Eisner v Macomber) KEY FEATURES OF ORDINARY INCOME

Must be characterised as ordinary income objectively from the perspective of the person deriving the income at the time of derivation – Scott v FCT Must be considered income at the time it is received – not before or after. Can’t be given out of goodness of heart 4. IT WILL OFTEN EXHIBIT PERIODICITY, RECURRENCE AND REGULARITY

1. It comes in to the recipient beneficially 2. It is money or something convertible into money 3. It must be 'received' as income 4. It will often exhibit periodicity, recurrence and regularity 5. The normal proceeds of personal exertion, property or business are income 6. Compensation receipts may be income if they replace a revenue loss 7. Illegal, immoral or ultra vires receipts do not affect character of receipt 8. Capital gains are not income at common law Not required to go through all, only in borderline cases 1. COMES TO RECIPIENT BENEFICIALLY Amount can only be ordinary income if it has been realised or derived. - Income is what comes in, not what is saved from coming out FCT FCT v Cooke & Sherden - Sellers of soft drinks and awarded free holiday for reaching sales quota. Held not ordinary income. 2. IT IS MONEY OR SOMETHING CONVERTIBLE INTO MONEY If the payment is not made in cash, you look at the value of the thing paid. FCT v Cooke & Sherden -Holiday could not be converted into money, therefore, not income. Payne v FCT -Travelled frequently for work, joined frequent flyer on her own money, could earn virtually non-transferrable tickets by flying through work. As frequent flyer points cannot be converted to money, not income. – confirmed in TR1999/7 s 21A ITAA36 says that non-cash business benefits which cannot be converted to cash will be treated as income if it can be converted only if in exchange for services (with regards to business transactions) s 15 – 2 ITAA97 says that non-cash business benefits, if convertible and in exchange for employment or services will be treated as income (with regards to employer → employee payments) 5 Q-stick is the goat

Dixon’s Case Clerk, joined army, employer said they would pay difference between army pay and their pay while at war. Court held that, “Periodic, recurrent and regular payment in return for services – income.” Payments were also relied upon as salary 5. AMOUNT HAS A SUFFICIENT NEXUS WITH AN EARNING ACTIVITY Test: Whether the receipt is the product of any employment of or services rendered by the receipt or of any business or other revenue earning activity carried on by them. Pure gifts and windfall gain, are therefore not income as they are not earned. 6. COMPENSATION RECEIPTS MAY BE INCOME IF THEY REPLACE A REVENUE LOSS A compensation payment will generally take the same character as the amount it replaces. If however one off payment – capital, not income • Compensation to replace salary while injured – income • Compensation to replace for loss of limb – capital 7. ILLEGAL, IMMORAL OR ULTRA VIRES RECEIPTS The nature of the receipt does not effect its characteristics. Lindsay & Ors v Inland Revenue Commissioners Whiskey smugglers in time of prohibitions, illegal in one country and not another, held profits assessable as part of a trading transaction. Seen to be absurd if money earned through legal means was taxed and those earned through illegal means were not. 8. CAPITAL GAINS ARE NOT INCOME AT COMMON LAW EXEMPT INCOME s 6-20 ITAA97; Subdivision 11-A – Three types of exempt income: • Certain kinds of entities are income tax exempt (charities, trade union, hospital) • Certain kinds of income are income tax exempt (interest on PI judgement debt) • Certain kinds of income to certain kinds of taxpayers are income tax exempt. (Defence force allowances, social service payments.)

6 - CATEGORIES OF INCOME

- payments or other benefits received for services provided; and - benefits or revenue (prizes and awards included) from playing sport

RENUMERATION FOR SERVICES RENDERED s 6(1) ITAA36 “Income from personal exertion or income derived from personal exertion means….” Look at s 6(1) for list of things that are income. Note: Most important factor is the connection between receipt and employment or services provided. WHETHER GIFTS TO EMPLOYEES ARE INCOME • Degree of connection to employment or services rendered • Reasonable expectation payment would be made • Dependence upon payment to meet usual living expenses • Payment replaces income • Motive of the payer or donor • Periodical, recurrent and regular • Money or convertible into money. FCT v Dixon The most important factor is the connection between the receipt and the employment or services provided. The payments were incidental to his employment and therefore, income. Payments were expected, periodic, regular and recurrent and in return for his enlistment in the army. Brent v FCT Wife of bank robber argued she had sold a capital asset, her story. Held amounts payable were income as they were in exchange for service in providing life story, so not capital. Moorhouse v Dooland Cricketer who was entitled to a weekly salary and received extra money based on his performance. Received extra money for ‘merito rious performances’ 16 out of 50 fixtures. Argued that it should be a gift. Held - that money arose as part of the regular course of his income and were periodic etc. and was written in K, so expected. Was renumeration for service he was providing. Seymour v Reed Cricketer received once off sum of money due to his personal attributes, not related to his performance and therefore, court held not income, merely a gift. Kelly v FCT AFL player won award for best and fairest, won $20,000. Even though he wasn’t playing to win award, it was incidental to his profession as a footballer (within the nexus of his employment) and moreover, was held to be income. TR 1999/17 – payments to sports people that are AI - payments received from, in respect of, or in connection with employment; 6 Q-stick is the goat

VOLUNTARY PAYMENTS •
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