Tax law exam cheat sheet PDF

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Tax Law Final Exam cheatsheet**Do not get caught up in mentioning everything in this doc - may be some things to add tooQuestion 1 (a) 13 marks - 30 minutes totalFBT consequences and liability Salary - not a fringe benefit because it is excluded from the definition of a fringe benefit: s 136(1)(f) o...

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Ben Bromell

Tax Law Final Exam cheatsheet **Do not get caught up in mentioning everything in this doc - may be some things to add too! Question 1 (a) 13 marks - 30 minutes total FBT consequences and liability! Salary - not a fringe benefit because it is excluded from the definition of a fringe benefit: s 136(1)(f) of the FBTA. Therefore, there are no fringe benefit tax (FBT) consequences arising from the provision of a salary for ___(employer).! Usual structure to follow! Benefit? ! - Yes [__state benefit!!__] is clearly a benefit and is provided in the year of tax! - The benefit is provided by ___’s employer and is provided to ____, who is the employee/ who is an associate! - It is provided in respect to employment, as… state reason! - eg. it is provided in respect to his/her employment as there is no other relationship between ___ and their employer from the facts! Section 136(1) definition of fringe benefit! Is it excluded?! - This is not excluded from the definition of a fringe benefit; s 136(1) definition of FB! Identify type of FB! - This is a ___ fringe benefit under s ___! Is there a reduction to taxable value?! - In house fringe benefit?! - Recipient’s contribution?! - Reduction under the otherwise deductible rule?! - Go through deductibility requirements! - Incurred in gaining/ producing assessable income; or! - Necessarily incurred in carrying on a business for the purpose of gaining/ producing assessable income! - NOT to the extent that it is a negative limb: ! - Capital or capital in nature! - Private or domestic in nature! - Incurred in gaining/ producing assessable income! - Specifically denied by another provision! - only if the recipient of the benefit is the employee (s 24)! - ‘To the extend that’ (may only be partially deductible)! Type 1 or type 2 fringe benefit?! - This is a type __ fringe benefit because… (use section reference). Therefore X's employer is/ isn’t entitled to income tax credit’s on the payment as [no] GST was paid. ! - Creditable acquisition per s 11-5 of the GSTA?! - Acquisition? Yes, X acquired a ____ which is the acquisition of a good therefore s 11-10(2)(a) is satisfied ! - Creditable purpose? Yes, X’s employer acquired ___ to provide as a fringe benefit which is for a business purpose. Assume the acquisition of ___ does not relate to the making of input taxed supplies. Therefore there is a creditable purpose per s 11-15! - Note: for creditable purpose we must prove: there were no input taxed supplies made; and there’s a business purpose! - " Was the supply a taxable supply? (Yes, because facts state that GST was paid)! - Consideration supplied? Yes, $[X] is consideration per s 9-15 of the GSTA! - Registration - yes, X employer must be registered for GST as their annual turnover is greater than $75,000 (GST registration threshold); s 23-5 GSTA! - {Because all of the elements of a creditable acquisition are satisfied, X is entitled to income tax credits on the [_object_] and therefore it is a type 1 fringe benefit}! **Stop there and work out any other fringe benefits (repeat above for other FBs)!

Ben Bromell Once we’ve worked out all fringe benefits:! Fringe benefit taxable amount = [X * 2.0802] + [X * 1.8868] = XX ; s 5B FBTA! FBT liability = XX (from above) * 47% = XXX s66; s 5B(1A) ! "

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Allowance vs reimbursement:! Issue - allowance vs reimbursement! Rule - a predetermined amount is an allowance: Road an Traffic Authority (RTA) of New South Wales (1993),TR 92/15. An allowance is classified as AY: s 15-2, whereas a reimbursement is not OY but a FB and therefore subject to FBT (TR 92/15). ! [Compensatory reimbursements for work expenses are not AY; Hochstrasser v Mayes (1960)] ! Application - case dependant! Conclusion - case dependant!

Question 1(b) 7 marks - 15 minutes total Assessable income consequences! Fringe benefits are non-assessable non-exempt income for the employee under s 23L (note to 15-2). ! Assessable income equals (s 6-1); Ordinary income (s 6-5) and Statutory income (s 6-10) but not non-assessable income (s 6-15)! OY?! • Sufficient nexus with income earning activities?! • Not a capital gain?! • Money or convertible to money?! • Realised gain?! • Real gain?! • Periodic, recurrent, and regular (not imperative but usually a good indication)! SY ! If it is not cash:! It is not ordinary income as it is not money or convertible to money (s 6-5): Tennant v Smith (1892); Cooke & Sherden (1980)! ‘Nonetheless, this portion will be assessable under s 15-2 as it is a benefit received in respect to the provision of services’! (s 15-2) - your AY includes the value of all benefits… whether things were provided in money or any other form.!

Salary: This is assessable as ordinary income under s 6-5 as it is a reward for the provision of services: Hayes (1956). Even if it were not assessable under s 6-5, it would be assessable under s 15-2 as statutory income as it is compensation given in relation to employment.!

Ben Bromell Gift vs income! This ______ is a gift, which may or may not be AY (benefits from a third party may or may not be income); Dixon (1952); Holmes (1995). Several factors must be considered before determining whether this is to be classified as AY:! • Have you been otherwise adequately remunerated for their services? Scott (1966); Brown (2002)! • Is there another relationship between the taxpayer and the provider? Scott (1966); Brown (2002); Smith (1987)! • Was the benefit solicited? Scott (1966); Hayes (1956)! • Can the benefit be traced to some activity by the recipient for which the provider is grateful? Holmes (1995); Brown (2002); Hayes (1956)! • Was the benefit of a kind which is a common incident of the recipient’s occupation? Scott (1966)! • Whether the benefit is available to anyone or a particular class of taxpayers: Laidler v Perry (1965); Smith (1987)! • Whether the benefit arose in the course of employment/ services: Holmes (1995)! • Motive of the donor: Dixon (1952); Holmes (1995)! • Recurrence of the payment: Dixon (1952)! Overall, whilst there are factors that suggest ___ which would mean that this amount is/isn’t included in X’s AY (section reference), this should be considered ___ because___. Hence, __ should/ shouldn’t be included in X’s AY (section reference). !

Question 2 13 marks - 30 minutes total Income tax consequences! Assessable income equals (s 6-1); Ordinary income (s 6-5) and Statutory income (s 6-10) but not non-assessable income (s 6-15). !

Ben Bromell OY?! • Sufficient nexus with income earning activities? (Keily, Anstis)! • Not a capital gain? ! • Go through capital gain vs income if required! • Money or convertible to money? (Tennant & Smith, Cooke & Sherdan)! • Realised gain? (Eisner & Macomber)! • Real gain? (Countess of Bective) ! • Periodic, recurrent, and regular (not imperative but usually a good indication); FCT vs Harris, FCT vs Blake! SY ! If it is not cash:! It is not ordinary income as it is not money or convertible to money (s 6-5): Tennant v Smith (1892); Cooke & Sherden (1980)! ‘Nonetheless, this portion will be assessable as SY under s 15-2 as it is a benefit received in respect to the provision of services’ (s 15-2) - your AY includes the value of all benefits… whether things were provided in money or any other form.! The $X for ___ is OY, however even if it isn’t OY it is definitely AY under as SY s 15-2 because it’s connected to the provision of services rendered by ___.!

Nexus requirement

Deductions! *Specify general deduction vs specific* - eg. “this is a general deduction under section__”! General deductions (s 8-1 ITAA97) Must satisfy one of the positive limbs:! • Incurred in gaining/ producing AY; or! • Necessarily incurred in carrying on a business for the purpose of gaining/ producing AY! Negative limbs! Cannot satisfy any negative limbs! • Capital or capital in nature! • Private or domestic in nature! • Incurred in gaining or producing non-assessable income! • Specifically denied by another provision! Specific deductions: no need to go through limbs - just use the legislation, case law, and explanation.! If only part of it is deductible (eg. membership fees limit of $42), try the rest under general deduction limbs! Repairs ‘This is likely to constitute a repair and is therefore deductible under s 25-10 as long as the same materials are used and the ____ is just restored to its previous condition.’! OR! This amount is likely not deductible because it is capital in nature, as it is a __(replacement, etc)___, consistent with (reason). According to s 25-10 capital expenses are not deductible. d ! OR! Assuming the same materials are used, this may be deductible as a repair under s 25-10 but not if the _asset_ is a separately identifiable asset. If it was a separately identifiable asset this would mean the asset is being replaced rather than repaired, making it capital in nature and therefore not deductible under s 25-10. ! Alternatively X may be able to depreciate the cost under the capital allowances regime in Division 40.!

Ben Bromell ***It is also not deductible as a general deduction as the negative limb of being ‘capital or capital in nature’ is satisfied (s 8-1). ! X will be able to deduct fees relating to his/ her tax agent under s25-5, as the accountant is a registered tax agent. The $X is also deductible even though it related to a capital transaction as it is not a ‘capital expense’; s 25-5(4). ! Capital allowances (Div 40) X is entitled to deductions from the value of the ___, which is a depreciating asset, for the X years over is its expected useful life (division 40). This is a depreciating asset as it is __ (s 40-30(1)) that is held for taxable (income-producing) purposes (s 40-25(7)). ! X can either use the diminishing value method or the rime cost method. ! If using the diminishing value method:! Base value = $X 40-70(a) —if it is the start of the asset’s life! or = cost less accumulated depreciation ! = $X 40-70(b) — if it is a later year! Deductible amount for year = base value * (days held during year/ 365) * (150%/ asset’s useful life); s 40-70! Deductible amount for year = base value * (days held during year/ 365) * (200%/ asset’s useful life); s 40-72!

Restrictive covenant! This amount is paid as a restrictive covenant, as it involves giving up the right to ____, and it is not in respect to your vocation. This is therefore a capital payment, as you are giving up the right to ___ rather than giving up income; Higgs v Oliver (1952); FCT v Woite (1982). Therefore this restrictive covenant is not ordinary income (s 6-5), as it capital in nature, and it is not caught under s 15-2 as it is not in relation to employment or services rendered. It will instead be considered a CGT event D1, as it involves X creating contractual rights with another entity; s 104-35. ! (If we need to calculate taxable value go to event D1 notes.)! Provision of knowledge! This amount is paid in respect to the provision of knowledge, in which you provided X with ____. Consistent with the decision from Brent (1971), this should be treated as OY through section 6-5, as it is in respect to a service rendered, and it is not capital (as the money is not being paid for the knowledge but for your services - anyone could go online and find research on ___). Even if it was not considered OY, it would be caught under s 15-2 as SY, because the money was received in relation to services rendered. ! Prize! This amount is a prize, which is not income unless:! • It is directly related to an income earning activity; Kelly (1985)! • This is not related to an income-earning activity…! • It involved extensive personal exertion or skill; or • You are carrying on a business; Stone (2005) ! Work out if they’re carrying on a business !

Carrying on a business:! 2 issues to address: ! • Is there a business?! • When did the business commence/ end — has the business commenced/ ended?! To determine whether you are carrying on a business we must consider a number of factors. No one factor is decisive, and it is necessary examine overall circumstances; Evans (1989)! Note that the fact that you are employed in a different occupation does not mean that you cannot be carrying on a business: Ferguson (1979)! • Existence of a profit-making intention; Stone (2005); FCT v JR Walker (1985); !

Ben Bromell

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• Objective test - it doesn’t matter what you intended, only what it appears to be from a third party’s perspective! Size and scale of the activities; Thomas (1972); ! Repetition and regularity; Ferguson v FCT (1979)! Nature of the activities - commercial in nature; Ferguson v FCT (1979)! Knowledge and skill; Ferguson v FCT (1979)!

Commencement/ termination of the business (timing is everything)! Under s 8-1 of ITAA 1997 if a business has not commenced, preliminary expenses will not be deductible (equally, income will not constitute income as still considered hobby)! Deductibility of business activities:! Div 35 of ITAA97! Business losses cannot be used against other income unless TP satisfies at least one of the following 4 tests (s 35-10)! • AY from business activity ≥ $20,000; s 35-30! • For at least 3 out of the last 5 years (including the current year), AY ≥ deductions; s 35-35! • The real property used in the business is ≥ $500,000! • The total value of other assets used in the business is ≥ $100,000 ! ^ If none of these tests are satisfied: “the losses can be offset in later years against profits from [the activity]; Division 35 ITAA97”! Exceptions:! • If your taxable income is more than $250,000 you can never use your losses against other income; s 35-10(2E)! • The tests don’t apply if your business is a farming or professional artist business and your other income is less than $40,000 - in this instance you may deduct immediately; s 35-10(4) ! s 21A ITAA36 - deems that non-cash benefits should be treated as if they were convertible to cash. * This is only relevant for people carrying on a business - NOT those who are simply employed! Capital gains/ CGT! **After determining that something is a capital gain/ capital in nature (with evidence)! Specify the CGT asset: “The ___ is a CGT asset under s 108-5(1)”! Must specify which CGT event occurred ! If the asset is acquired pre 20/09/1985 the capital loss is disregarded - state what section this is under! • Go through steps outlined in notes! - Is there a CGT event?! - Is there a CGT asset?! - Do any exceptions, special rules or exemptions apply?! - Can there be a roll-over? CGT event A1/C1/C2 “The ___ is a CGT asset under s 108-5(1)” The sale of ___ gives rise to CGT event A1/C1/C2 because it is a disposal of a CGT asset; s 104-10 ITAA97. To work out the CGT liability we first calculate the asset’s cost base:! Element 1 costs (s 110-35):! Element 2 costs (s 110-25(4)):! Element 3 costs (s 110-25(4))! Element 4 costs:! Element 5 costs:! Capital gain/ loss = capital proceeds - cost base (s 104-10).! Capital proceeds = $X which is the amount received on the CGT event; s 116-20.! Therefore the capital gain = ___! Discount:! " This CGT event is not eligible for discounting as the asset was not held for 12 months; OR!

Ben Bromell " " " " "

This CGT event is made by an individual; it resulted from a Cut event that occurred after " 11:45am EST on 21/09/1999, it is worked out without the cost base being indexed; and " the CGT asset was owned by the taxpayer for longer than 12 months - therefore this is "" discount capital gain; s 115-5; s 115-50!

CGT event D1 “The ___ is a CGT asset under s 108-5(1)”! The ___ gives rise to CGT event D1 because ___ has created contractual rights with another person: s 104-35! Capital gain/ loss = capital proceeds - incidental costs; s 104-35(3)! Capital proceeds = $X which is the amount received on the CGT event; s 116-20.! Incidental costs are set out in s 110-35, and in this case they amount to ___.! Therefore the capital gain = ___! This capital gain cannot be discounted because gains on CGT event D1 are not eligible for the discount: s 115-25(3). ! Hence, the $X must be included in X’s AY as SY (as a net capital gain); s 102-5. Eg. ! The cost base of this asset is __ (first element cost) (s 110-25(1)) plus ___ (third element cost) (s 110-25(4)); Division 110 s 110-25 ! The indexed cost base is ______ *calculations* (s 110-36). OR ‘there is no indexing in this scenario as the asset was acquired post 21 September 1999.! If capital loss calculate the reduced cost base ! capital proceeds are $X (s 116-20(1)). Capital gain is therefore $X-$Y=$Z (s 102-22) ! Tax offsets ! • Low income tax offset (see notes) ! • Low and middle income tax offset! As X’s taxable income is below $Y, they will be entitled to a low income tax offset of $Z to deduct against any tax payable; s 150N ITAA36 & s67-20 ITAA97. **Note this is a non-refundable offset.! As X’s taxable income is below $X they will also be entitled to a low and middle income tax offset of $Z; s 61-105 ITAA97! Medicare levy! All Australian resident individuals are liable to pay the Medicare levy: s 3-5(1). This amounts to 2% of taxable income, in addition to the tax paid on taxable income…! You may also be liable to pay a medicare levy surcharge, if you earn above the $90,000 threshold (individual). !

Ben Bromell

Questions 3 17 marks - 40 minutes total Residency! An Australian resident is a person who resides in Australia for the purposes of ITAA36: s 995-1. We will assume you are not a temporary resident under s 995-1(1) (which would mean you are only taxed on your Australian soured income; s768-910).! In order to be considered an Australian resident at least one of the following tests must be satisfied; s 6-1 ITAA36! • Ordinary resident test! • Domicile test! • 183-day test! • Superannuation test! Even though one test may be satisfied, it is important to consider all, as the tests (particularly the first two) are not rigid and are conducted subjectively. ! We will now consider each of these tests in turn.! Ordinary residence test; s 6(1) ITAA36! You will be a resident if you reside in Australia s 6(1) ITAA36. We must consider several factors in determining whether you reside in Australia, all of which are merely indicators rather than determining factors; Harding (2018).! Factors to discuss:! • Physical presence in Aus! • Frequency, regularity and duration of visits; Lysaught (1928)! • Purpose of the visits to Australia and abroad! • Maintenance of a place of abode in Australia! • Existence of a place of abode outside Australia; Levene (1928); Miller (1946); Joachim (2002)! • Family, business and social ties; Handsley (2019)! • Investments/ bank accounts; Handlsey (2019) - bank accounts are not as big of a factor anymore as they are more common! • Nationality (least important) ! Domicile test! Under the domicile test, you are an Australian resident for tax purposes unless the Commissioner is satisfied that the TP has a permanent place of abode overseas; s 6(1)(a)(i) ITAA36. ! A place of abode refers to a home or presence outside Australia; Applegate (1979). ! Firstly, whilst your domicile of origin is ___, your domicile of choice is clearly Australia, as this is where you have spent ….., and from the facts it appears that your intention is to make Australia your home indefinitely; s10 Domicile Act 1982. Equally, the prima facie for this test involves assuming you are domiciled in Australia. ! **Start of by deciding whether they are domiciled in Aus: ! • Domicile of origin (section reference/ case law??)! • Domicile of choice - intention to stay indefinitely (IT 2650) ! However, we must decide whether ! Then decide whether they have a permanent place of abode overseas:! Rule of thumb is that you must intend to leave for at least 2 years (jenkins)! Factors to be taken into account:!

Ben Bromell • Intended and actual stay in the foreign country; Applegate (1979); Jenkins (1982)! • Duration & continuity of TP’s presence in overseas country; Jenkins (1982)! • Establishment of a home outside of Australia (more than temporary accomodation); Harding (2019)! • Residence of place of abode in Australia! • The durability of the association with Aus ! • Maintenance of bank accounts! • Education of children! • Family ties! 183...