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Sources of Tax law and Legislation Income Tax Assessment Act 1936 (Cth) (ITAA36) Income Tax Assessment Act 1997 (Cth) (ITAA97). Taxation Administration Act 1953 (Cth). (primary tax administration rules, This Act establishes the office of the Commissioner of Taxation. The Commissioner of Taxation is entrusted with the general administration of Australia’s Federal tax laws) Fringe Benefits Tax Assessment Act 1986 (Cth) (‘FBTAA’) A New Tax System (Goods and Services Tax) Act 1999 (Cth) (‘GST Act’). Captial Gains Tax is not contained in separate legislation; it is contained in the ITAA97. Swinburne Library- CCH Intelliconnect - Tax

Steps to answering a discussion question: 1. Identify the tax issue(s) that is contained in the question. Try to summarise the issue or issues in a single sentence. 2. Identify, with reasoning or argument, the sections of the ITAA and cases that may be relevant to the issues that you identified at point 1. List the section numbers, the case names, and identify which areas of tax law they relate to. 3. Apply the law to the facts. Put forward both the FCT argument and the taxpayer argument, based on the relevant case law and statutory law. 4. Conclusion. State your answer to the question, with reference to your analysis. These questions require a detailed analysis of the relevant sections of the Income Tax Assessment Act and cases. Questions such as this usually require you to: 1. Identify the main issue(s), for example: is the person an Australian resident for income tax purposes as required in ITAA36 s6. 2. Identify the cases and legislation that will assist you in answering the question. 3. Work through the facts sometimes presenting the Australian Taxation Office (ATO) view, the view that will require the person to pay more Australian tax, and then present the law and facts looking at the issues from the taxpayer's position. 4. Draw a conclusion based on your analysis.

Assessable income Assessable income comprises: Ordinary income: Income Tax Assessment Act 1997 s. 6.5 (AustLII 2010c) plus statutory income: ITAA97 s. 6.10 (AustLII 2010d) ITAA 97 s. 6.23 (AustLII 2010e) and excludes exempt income: ITAA97 s. 6.20 (AustLII 2010f) and non assessable non exempt income: ITAA97 s. 6.15 (3) (AustLII 2010g). If the amount is both ordinary income and statutory income it will be assessed as statutory income.

Ordinary income Ordinary income is income according to ordinary concepts. It is convenient to analyse ordinary income under six headings:  Income when the receipt is regular, reliable and expected.  Income from personal services and employment.

 Income from business.  Income from isolated profit-making undertakings or schemes.  Income from property: rent, interest, annuities and royalties.  Income from compensation: plus exempt income. Reference: Chapter 3.2: Ordinary income (pp. 42–45)

Income that's periodic, regular and expected A salary substitute: FCT v. Dixon (1952) 86 CLR 540 (PTL 2019, s. 5.130, 6.70, 6.220, 10.20, 10.70) Reference: Chapter 3: Assessable income/income tax (pp. 42–58)

Income from personal services and employment Payments as a reward for services rendered:  Moorhouse v. Dooland (1955) Principles, Chapter 6, Paragraph 6.20.  Brent v. FCT (1971) 125 CLR 418 (PTL 2019, s. 6.40, 6.140, 16.20). Payments that are personal gifts:  Scott v. FCT (1966) 117 CLR 514 (PTL 2019, s. 6.20, 6.90, 6.100, 6.220).  Hayes v. FCT (1956) 96 CLR 47 (PTL 2019, s. 6.20, 6.40, 6.90, 6.100, 6.220). Prizes and chance winnings: Kelly v. FCT (1985) 16 ATR 478 (PTL 2019, s. 6.40, 6.110, 6.120, 8.80). Non-cash benefits:  Benefits from a loyalty program received by an employee: Payne v. FCT (1996) 32 ATR 516 (PTL 2019, s. 5.60, 6.130, 6.210, 6.220, 7.58)  Benefits provide by an employer to an employee will be discussed in Week 3. Payments for entering into restrictive covenants: FCT v. Woite (1982) 13 ATR 579 (PTL 2019, s. 6.160, 6.170). Reference: Chapter 3.5: Personal services and employment income (pp. 47–49)

Income from personal services—statutory income Allowances for services rendered - ITAA97 s. 15–2:  Smith v. FCT (1987) 19 ATR 274 (PTL 2019, s. 6.190, 6.220). Reimbursement of car expenses - ITAA 97 s. 15–70: Reference: Chapter 3.3: Statutory income (p. 46)

Exempt income Definition ITAA97 s. 6–1 (3). Classification of exempt income: Entities for whom all income received is exempt no matter what type of income they derive. List of these entities is in ITAA97 s. 11–5 and includes public universities: Income which is exempt regardless of who derives it, such as income from a scholarship. Reference: Chapter 1.6 The income tax formula (pp. 21–22)

Income from business Business is defined in ITAA97 s. 995–1(1): 'It includes any profession, trade, employment, vocation or calling but does not include the occupation as an employee.' Indicators identifying business activity  Is there a profit making intent—what about sports people?  System and organisation employed—What about gambling?

 Scale of the activity—Is the activity a hobby?  Sustained regularity and frequency of transactions.  Commercial approach to the transactions—Is advice obtained regarding the transaction.  Characteristics or quantities of property.  GP International Pipecoaters v FCT (1990) 21 ATR 1 (PTL 2019, s. 8.140)  FCT v Cooling (1990) 21 ATR 13 (PTL 2019, s. 8.240, 8.250).  FCT v GKN Kwikform Services Pty Ltd (1991) (CCH Australia Limited 2019a).  FCT v Radnor (1991) 22 ATR 344 (PTL 2019, s. 8.90).  FCT v Stone (2005) (CCH Australia Limited 2019b).  Ferguson v FCT (1979) 9 ATR 873 (PTL 2019, s. 8.20, 8.40, 8.50). Reference: Chapter 3.6: Business income (pp. 49–52)

It is convenient to analyse ordinary income under six headings 'Ordinary income is income according to ordinary concepts.'  Income when the receipt is regular, reliable and expected.  Income from personal services and employment.  Income from business.  Income from isolated profit making undertakings or schemes.  Income from property—rent, interest, annuities and royalties.  Income from compensation—plus exempt income. Reference: Chapter 3.6: Business income (pp. 49–52) Non-cash business benefits Under general principles ordinary income doesn’t include receipts that are not cash or cash convertible. ITAA36 Section 21A allows the FCT to put a value on non-cash business benefits that if received in cash would have been ordinary income. FCT v. Dixon (1952) 86 CLR 540 (PTL 2019, s. 5.130, 6.70, 6.220, 10.20, 10.70) Reference: Chapter 3.6: Business income (pp. 49–52)

Isolated and extraordinary transactions Transactions that are not within the usual activities of an ongoing business are known as 'extraordinary transactions' and may be ordinary income or capital. An isolated transaction is a one-off transaction not undertaken by an existing business and may also result in the profit being ordinary income or capital.  Scottish Australian Mining Company Ltd v FCT (1950) 81 CLR 188 (PTL 2019, s. 8.140, 8.180)  FCT v Myer Emporium Ltd (1987) 163 CLR 199 (PTL 2019, s. 5.80, 8.130, 8.150, 8.170, 8.210, 8.220, 8.250, 8.260, 10.150, 10.280)  Westfield Limited v FCT (1991) 21 ATR 1398 (PTL 2019, s. 8.150, 8.170, 8.220, 8.250)  FCT v Whitfords Beach Pty Ltd (1982) 12 ATR 692 (PTL 2019, s. 8.170, 8.180, 8.190, 8.200, 8.260, 8.280, 8.290, 10.150) Reference: Chapter 3.6: Business income (pp. 49–52)

Income from property

Ordinary income may be earned from owning and holding property. The gain made from selling property may be ordinary income (selling trading stock) or a capital gain (selling the office furniture). Definition ITAA 36 S6(1) Interest ITAA97 s. 6–5 Dividends - this will be discussed in Week 9 Rents ITAA97 s. 6–5 Royalties ITAA97 s. 6–5 & s. 15–20  McCauley v FCT (1944) 69 CLR 235 (PTL 2019, s. 9.190)  Stanton v FCT (1955) 92 CLR 630 (PTL 2019, s. 9.200) Annuities ITAA36 s. 27H Reference: Chapter 3.7: Property income (p. 52)

Compensation receipts Compensation normally takes the character of the item it replaces. Compensation of an income nature Loss of trading stock:  FCT v Wade (1951) 84 CLR 105 (PTL 2019, s. 10.220, 17.20). Loss of salaries and wages: FCT v DP Smith (1981) (CCH Australia Limited 2019). Cancellation of employment contract: C of T v Phillips (1936) (CCH Australia Limited 2019). Cancellation of trading contracts:  Heavy Minerals Pty Ltd v FCT (1966) 115 CLR 512 (PTL 2019, s. 10.170)  Dickenson v FCT (1958) 98 CLR 460 (PTL 2019, s. 9.170). Compensation of a capital nature Loss of capital assets:  Federal Coke Pty Ltd v FCT (1977) 7 ATR 519 (PTL 2019, s. 5.155, 5.160). Cancellation of structural contracts: Apportionment of payments Reference: Chapter 3.8: Compensation and reimbursements (pp. 53–55)

Exclusions from FBT  Salary and allowances FBTAA 86 s. 136(1).  Superannuation contributions to a complying superannuation fund FBTAA 86 s.136(1).

Exempt benefits - specific provisions  Newspapers used for business purposes FBTAA86 s. 58H.  Minor benefits with a tax value less than $300 s. 58P.  Work related items including portable electronic devices used mainly for work related purposes s. 58X.  Membership fees and subscriptions s. 58Y.  Single trip taxi travel s. 58Z.

Determining the tax value of a fringe benefit There are 13 categories or types of fringe benefits in the Act. The following seven are the fringe benefits that you are expected to know.

Car Fringe Benefits Division 2 There are two methods to determine the tax value of a car that is provided by an employer to an employee that is used at least partially for personal use. The statutory formula method FBTAA86 s. 9, or The cost basis method s. 10. Debt waiver s. 14 Occurs when the employee owes an amount to the employee but the debt is waived by the employer. The debt doesn’t have to be repaid. Loan fringe benefits s. 16 Occurs when the employer lends money to the employee for less than the statutory interest rate (statutory interest rate 2017/2018 is 5.25%). Expense payments s. 20 This occurs when the employer pays an expense incurred by the employee or reimburses an employee for expenditure incurred. Meal entertainment s. 37AC This occurs when the employer provides entertainment by way of food and drink for employees.  Property benefits (goods supplied to an employee) s. 40 1. An in house property fringe benefit is property that the employer normally sells as part of their business, and the tax value is determined by the following rules. FBTAA s. 42. Manufacturer If a manufacturer sells to other manufactures or retail business’s the tax value is the lowest price the goods are sold for. If the manufacturer sells direct to the public the tax value is 75% for the lowest price sold to the public. A retail business The tax value of an in house benefit is the lowest price the employer paid for the goods. 2. An external property benefit is property that the business doesn’t normally sell. The tax value is the price the employer paid for the asset. FBTAA s. 43.  Residual fringe benefits s. 45 1. In house residual benefit FBTAA s. 48 An in house residual benefit occurs when the employer provides a service to the employee that it provides to the public. The tax value will be 75% of the price that would normally be charged to the public. 2. Non in house residual benefits FBTAA s. 50 If the other FBT sections don’t apply to the tax value of the benefit given to the employee, such as providing tickets to attend a concert, then the benefit will be a residual benefit and the tax value is the amount that the employer paid for the item. FBTAA s. 50.

Miscellaneous reductions and concessions In - house fringe benefits The total tax value of in - house benefits, whether property or residual benefits, granted to an employee in any FBT year is reduced by $1,000. Therefore if the Tax Value of the in- house fringe benefits provided to an employee is less than $1,000 no FBT is payable. Otherwise deductible

Where the employee would otherwise have obtained an allowable deduction if they had incurred the expense themselves the benefit would not be subject to fringe benefit tax. For example when the employee receives an expense payment reimbursement for CPA membership, the CPA membership, if paid by the employee would have been an allowable deduction. Or obtaining a loan from the employer at less than the statutory interest rate and using the borrowed funds to purchase income producing assets. These types of fringe benefits are known as “otherwise deductible” and are not subject to FBT. Employee makes a payment Where the employee pays an amount toward the cost of the benefit this reduces the tax value of the fringe benefit.

Deductibility of fringe benefit payments Any FBT liability incurred in providing a fringe benefit and the cost of providing the fringe benefit are generally allowable deductions to the employer as a business expense. Reference: Chapter 5: Fringe benefits tax (pp. 74–86)

Goods and services taxation GST is a tax on consumption administered by the Australian Tax Office. The current rate is 10% which is levied on the purchase price of most goods and services. Reference: Chapter 13: Goods and services tax (pp. 236–245)

Who pays the tax? This is best explained in an example in the How the GST works (Figure 13.1) diagram in the Basic operation of the GST chapter. Reference: Chapter 13.1: Basic operation of GST (p. 236)

Registration This is a key aspect of the GST as registered bodies (companies partnerships or sole traders) receive a refund of the tax they have already paid when they in turn sell the item or service to another party. The effect of this is that it is the final consumer of the product, someone who is not registered, who pays the tax as they don’t receive a refund. Businesses that have a turnover of $75,000 must register for GST. Reference: Chapter 13.9.1: Registration (p. 241)

Taxable supply GST is paid when a business sells goods or services for consideration. There are certain goods and services which are exempt including Food for human consumption, Health, Education, Child care and Exports. Reference: Chapter 13.2: Taxable supplies (pp. 236–237)

Input taxed supply Certain business’s such as banks or the owners of rental properties pay GST on their purchases but their customers don’t pay GST on the services that they receive. Reference: Chapter 13.5: Input-taxed supplies (Division 40) (pp. 239–240)

Introduction 

The meaning of a capital gains tax event ITAA97 s. 102–10 (1).

 Definition of a capital gains tax asset ITAA97 s. 108–5 (1). Reference: Chapter 4: Capital gains tax (pp. 59–68)

Summary of Capital Gains Tax events There are 12 major categories of capital gains tax events listed in ITAA97 s. 104. The categories that we will focus on in our course include: A1 Disposal of a CGT asset s. 104–5 to s. 104–10 C1 Loss or destruction of a CGT asset s. 104–5 to s. 104–20 D1 Creating contractual rights s. 104–5 to s. 104–35 Reference: Chapter 4.3: CGT events (pp. 61–62)

CGT assets The definition of an asset is very broad and includes land and and buildings, shares in a company and debts owing to you. s. 108-5  Collectables (examples include antiques, jewellery and artwork). A capital gain or loss from a collectable is disregarded if the first element of the cost (the purchase price or value at time of gifting) does not exceed $500, s. 118–10.  Personal use assets (examples include caravans, boats, but excludes land and collectables). Capital losses are always disregarded. Capital gains are disregarded from the disposal of a personal use asset when the first element of the cost (the purchase price or value at time of receiving a gift) does not exceed $10,000, s. 118–10. Reference: Chapter 4.2: CGT assets (pp. 60–62)

Specific exemptions  Disposal of pre 20 September 1985 assets s. 104–10(5).  Depreciating assets s. 118–24.  Trading stock s. 118–25.  Motor vehicle s. 118–5.  Decorations for valour s. 118–5.  Compensation for personal injuries s 118–37.  Gambling s. 118–37.  Main residence s. 118–110.  Otherwise assessable s. 118–20. Reference: Chapter 4.5: CGT exemptions and some special rules (pp. 64-65)

Calculating the capital gain or loss  Capital proceeds and the market substitution rule When an asset is disposed in a non arms length transaction the market substitution rule may apply if the disposal was for less than its market value. s. 116–30  Determining the cost base s. 112–20 There are five elements of the cost base: 1. The money paid or the value of a gift. 2. Incidental costs incurred when buying or selling the asset. 3. Costs of owning the asset. 4. Expenditure to increase or preserve the asset–capital costs. 5. Expenditure to defend your rights to the asset.  Reduced cost base

This is when the asset is disposed of at a loss and cost base three is ignored. Reference: Chapter 4.4: Cost base and reduced cost base of a CGT asset (Bevacqua et al. 2021, pp. 63-64).

Calculating net capital gains and net capital losses ITAA97s102–5 i) Calculate the individual capital gain or capital loss for each asset sold, gifted, lost or destroyed. ii) Identify any collectable losses not able to be offset against collectable gains to carry forward. iii) Apply the 50% discount where appropriate. iv) The net capital gain is included in assessable income and net capital losses are carried forward. Reference: Chapter 4.6: Calculation of net capital gains or net capital losses (Bevacqua et al. 2021, pp. 65-68).

Discount capital gains A capital gain made by an individual, trust or superannuation fund, but not a company, from an asset held for more than 12 months at the time of disposal may be discounted by 50% or 33.3% for a superannuation fund Div 115. Companies are not entitled to the general CGT discount. Some CGT events such as creating contractual rights, D1, cannot be discounted, s. 115-25. Reference: Chapter 4.6.1.2: Discount method (Division 115) (p. 66)

Small Business relief To be considered for this exemptions the entity must not have assets in excess of $6 million or its total turnover is less than $2 million. Total exemption from CGT if the asset sold was owned for at least 15 years and the taxpayer must be at least 55 years old. If the asset was owned for at least 3 years then the total discount is 75%. Reference: Chapter 4.7: Special CGT rules on SBEs (p. 68)

Residency of taxpayer  Australian residents are taxed in Australia on income from all sources whereas foreign residents are only taxed in Australia on Australian sourced income.  Resident is defined in Income Tax Assessment Act 1936 (ITAA36) (AustLII 2010a), s. 6. Individuals There are four tests: 1. Residency according to ordinary concepts—this is known as the primary test. 2. Domicile test—An Australian overseas. You are an Australian resident if you are domiciled in Australia unless your permanent place of abode is outside Australia. Refer to:  Applegate v F.C.T (1979) 9 ATR 899 (PTL 2019, s. 4.110)  F.C.T. v Jenkins (1982) 12 ATR 745 (PTL 2019, s. 4.110).

3. 183 day test—An overseas person in Australia. You are an Australian resident if you are physically present in Australia for more than 183 days except if your usual place of abode remains outside Australia and you do not intend to reside here. 4. A member of the Commonwealth superannuation fund—mainly for Australian public servants who may be required to work overseas. References: Chapter 2.2: Individual residency tests (pp. 26–30) Companies A company is a resident of Australia if: 1. The company is incorporated in Australia or 2. Carries on business in Australia and either:  its central management and control is here or  the controlling shareholders reside here. Refer to:  Koitaki Para Rubber Estates Ltd. v F.C.T. (ATLC, p. 341).  Malayan Shipping Company Ltd v F.C.T. (1946).  De Beers Consolidated Mines Ltd v Howe. References:  Chapter 2.3: Business entity residency tests (pp. 30–33)  T...