Week 2 Workshop with answers PDF

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LLB347 Taxation Law Semester 3, 2016 Workshop 2 – Income according to ordinary concepts, residence and source READINGS Read the following to prepare for your workshop: 1. Legislation:  Sections 4-10; 4-15; 6-5; 6-10 of the 1997 Act 2. Tax Rulings  Taxation Ruling TR 98/17 3. Case Law (or relevant case notes and extracts) for consideration:  FCT v McNeil [2007] HCA 5  FCT v Dixon (1952) 86 CLR 540  Scott v FCT (1966) 117 CLR 514  FCT v Cooke & Sherden 80 ATC 4140  C of T (Vic) v Phillips (1936) 55 CLR 144  FCT v Woite (1982) 82 ATC 4578  Keily v FCT 83 ATC 4248  FCT v Unilever Australia Securities 95 ACT 4117  Adelaide Fruit and Produce Exchange Co Ltd v DFCT (1932) 2 ATD 1 Discussion / focus questions Question 2.1 Citing relevant legislation / case law / rulings answer the following questions: a) What section defines “assessable income” and how is the term defined? S6-1= ordinary income (s6-5) and statutory income (s6-10). Not exempt income. b) Income has sometimes been described as “fruit”, whereas capital is considered the “tree”. What does this mean? “tree”- asset-capital- what generates income Eg. Rental property; shares; business property, cash (in the bank) “fruit’- income-what is generated by the tree Eg. Dividends; Rent; lease fees; leasing fees; interest c) How is “ordinary income” defined and by what section?

2 S6-5- Income according to ordinary concepts [case law] d) What are some of the characteristics of ordinary income?  Return for use of an asset  Regular, recurrent, periodic  Money or monies worth  Income generally gross basis  Received by the taxpayer  Characterised in taxpayer’s hand  Relied upon e) How is “statutory income” defined and by what section? S6-10 – Amounts which are income because the Act says they are. f) 1. 2. 3. 4.

What are the 4 tests of residence for individuals? Common law- resides test Domicile test 183 days’ test Superannuation test

Individual just need to satisfy one to be a resident. g) Where is interest income sourced? Location of the bank account where the money(tree) is. Short questions Question 2.2 Which of the following will be income according to ordinary concepts? Provide reasons for your answers. Consider the characteristics of ordinary income. For example:  Income as a flow- capital v revenue distinction (Elsner v Macomber) Therefore, capital gains are not ordinary income.  Ordinary income will often exhibit periodicity, recurrence and regularity (FCT v Dixon; Kelly v FCT)  Ordinary income “comes in” to the recipient. (Tennant v Smith; FCT v Cooke & Sherden) Therefore, a mere saving of expenditure is not ordinary income.  Ordinary income is money or money’s worth. Therefore, it must be received as cash or in a form that is convertible into cashnote: o S15-2 of the 1997 Act (Allowances and other things provided in respect of the employment or services) o S21 of the 1936 Act (Conversion to cash), and

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o S21 of the 1936 Act (Non-cash business profits) Characterised in the hands of the recipient, not the character of the expenditure by the other party (FCT vMcNeil) Mutuality principle – taxpayers cannot derive income from themselves Illegal, immoral or ultra virus receipts may be ordinary income.

a) Salary / weekly pay Consider characteristics such as nexus with services, periodic payments etc. Case: FCT v Dixon Answer: Income b) Winning the lotto Here, contrasts a one-off receipt in the form of a windfall gain and receipts that are periodic in nature. The lotto winning is also not a reward for providing services. Answer: Not income. But if taxpayer gambles regularly. Look at: 

Tax Ruling IT 2655



Brajkovich v FCT

Answer: Maybe. Note: CGT s118-137- Exclusions from CGT [ Money received is generally income or capital]. Gambling excluded both as income or capital. c) Client leaves an accountant a gift in her will Consider the windfall gain vs income distinction. Whether this is ordinary income will depend on whether there is the necessary connection to employment or not. Case: Scott v FCT Answer: Maybe. Consider the motive of the donor, depends on the facts of the case. A purely gift is not an income. Gift and Tip 

Tip= income – reward for services well performed- nexus with an a activity

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Gift= not income – if gratuity

d) Sports person earns some money in advertising and prize money TR 1999/17 provides some useful discussion on this point. (1) Advertising money Answer: Yes. – doing something in return as endorsement.

4 (2) Prize money There are a number of sports person type cases in which the courts have considered the issue of whether prize money and payment for advertising is income or not. For example: 

Moorehouse v Griffiths (prize as appreciation for played a good game. Answer: Not income)

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Stone v FCT (sponsorship prize is an income)

Advertising = quid pro quo – endorsement in return for cash Answer: Income Prize = Eg 1: Nathan squash at local squash court $ 50 if- hobby Answer: Not income Eg 2: David BecKham got a prize for kicking goals $3000 -

Professional player- in contract. Answer: income

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Professional player- unknown.

Answer: income

e) A waitress receives money in tips. Consider the regularity of receipts and connection to employment. Contrast receipts that are due to personal relationships (ie. Scott v FCT) TR 95/11 at paragraphs 19 and 41-44. Answer: Yes. f) A writer has just finished writing her first book and sells her copyright in the book to a publisher. The issue is whether the receipt is for the provision of services or for the disposal of the capital. See Brent v FCT, factors in determine whether this is income or capital include: 

Whether payment is product of any employment, services rendered, or any business

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Quality or character of payment in hands of the recipient

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Form of the receipt – ie. Lump sum or periodically

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Motive of the person making the payment, though this is rarely decisive.

Here, given it is her first book, it is arguably capital. Answer: Not income.

5 g) A dress designer receives a free holiday from one of the retail companies that specialises in selling her designs. Consider here that the money must “come in” to the taxpayer. See: 

FC of T v Cooke & Sherden



Ss21 and 21A of 1936 Act



IT 2668

Ss21 and21A of 1936 Act are deeming provisions. – saying something is when it is not. According to the provision, a holiday that cannot be transferred would not be money or monies worth. But the law says it is convertible into money. Therefore the holiday is deemed as money. Answer: Yes h) An employee receives a reimbursement of her legal costs by her employer following an unfair dismissal case. The issue is whether this is a capital receipt or ordinary income. 1. Where the compensation replaces forgone income, it tends to be ordinary income. 2. If the compensation replaces a capital type of item (eg. Destroyed asset) then it is capital. For example: 

Re Allman v FCT and FCT v Rowe (1997). Where the matter relates to unfair dismissal, it is likely to be a breach of contract, which would be capital in nature. – TD 93/29 at paragraph 5. Answer: Not income

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Replace of wages. Answer: Income

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Legal expenses= return to job that was gone- capital Answer: Not income

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Legal expenses= relate to ongoing employment- disciplinary matters Answer: Income

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Putting it all together Discuss as follows: 1. Define taxable income (ss4-10, 4-15) 2. Then define assessable income- ordinary and statutory income (ss6-5,6-10) 3. Determine whether the taxpayer is a resident (s995-1 of 1997 Act and s6(1) of the 1936 Act) remembering: - Australian residents- all ordinary and statutory income derived from all sources whether within or outside Australia is assessable. - Foreign residents- only ordinary and statutory income derived from Australian source is assessable. - Apply the four residency tests: (1) Common law test- resides (2) 183 Days test (3) Domicile test (4) Superannuation test 4. Determine whether the amounts are income according to ordinary concepts (s6-5)- apply characteristics of ordinary income and case law. 5. Apply the relevant source rules to that income if the taxpayer is a foreign resident. Residence Section 995-1 defined as resident of Australia for the purpose of Income Tax Assessment Act 1936. Section 6(1) of the 1936 Act provides 4 tests: a. Common Law test- a person who resides in Australia b. Domicile test- a person whose domicile is in Australia, unless the Commonwealth is satisfied that his permanent place of abode is outside Australia  Physical presence  Employment ties  Family ties  Frequency, regularity and duration of visits  Habits and way of life  National (but not significant) c. 183 DAY test- a person who has actually been in Australia, continuously or intermittently, during more than ½ the income year, unless the Commonwealth is satisfied the person’s usual place of abode is outside Australia, and does not intend to take up residence in Australia. d. Superannuation test- eligible employees for the purpose of the superannuation Act

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Question 2.3 Mary is an American citizen who has arrived in Australia on 20 October 2014 to take up an executive position with YCoy Ltd. Her contract with the company is for a period of four years and she plans to return to America when her contract expires. As Mary intends to return at the end of her employment contract, she has rented out her home in America. Rent paid to Mary from 20 October 2014 to 30 June 2015 totalled $10 000. On arrival in Australia, Mary takes a 12 month lease on a one bedroom unit near her office. Sadly, Mary has no friends in Australia, and her only family is a distant Uncle, who lives in England. Mary’s income from salaries and wages from 24 April 2015 to 30 June 2015 is $50 000. What is Mary’s taxable income for the year ended 30 June 2015? Apply 1.2.3.4. and 5. And assess whether Mary is a resident of Australia under the four tests. -

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Superannuation test does not apply to Mary Domicile test does not apply since Mary was not born in Australia and has no family connection in Australia Mary satisfies 183 DAY test requirements, since she arrived on 20 Oct 2014, which indicated Mary was present in Australia for ½ an income year since arrival. Mary also satisfies Common law test, because she is physically present in Australia for more than half a year, has employment ties in Australia, the intended duration of her visit will be four years for employment purpose. Although she does not have family ties in Australia, and her nationality is America, but she still is very likely to satisfy the Common law residency test. Plus Mary only need to satisfy one test to be Australian resident, therefore Mary is an Australian resident.

Ordinary income for Mary for the year ended 30 Jun 2015 is as following: $10,000 rental income – from American property $50,000 salaries and wages – from Australian employment Both sources will be ordinary income. Source Rules S995-1 of the 1997 Act and s6(1) of the 1936 Act The assessable income for Australian residents is all ordinary and statutory income derived from all sources whether within or outside Australia.

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So Mary as an Australian resident her taxable income is: Taxable income= $60,000 [$50,000 wages + $10,000 (rent)]

Question 2.4 David is an executive with a Chinese multinational company, XCoy Ltd. He is an Australian citizen and has retained his Australian domicile despite having spent most of the last 10 years in various overseas countries. Though he has been in and out of Australia on business since accepting his first overseas posting, David has spent the last 6 years living in New Zealand with his wife. During this period he was continually employed with XCoy. In the 2014-2015 financial year, David was paid an annual salary of $300 000 from XCoy and this was paid to David’s NZ bank account. Interest on the NZ bank account for the 2014-2015 financial year totalled $100. In order to provide a stable education for his two children, David and his wife decided that their children should be educated in Brisbane and they attend boarding schools in Brisbane. David and his wife have always returned to Australia each Christmas holidays – usually for a period of two months – so that the family can be together. They eventually intend to retire and live in Brisbane. To facilitate the Christmas holiday, David maintains a townhouse at Labrador on the Gold Coast, which he leases to tertiary students during the university year. Rent paid to David on the townhouse totalled $50 000 for the 2014-2015 financial year. David is always able to arrange some in-house consultancy work while he is in Australia over Christmas, which helps finance his annual visits. In the 2014-2015 financial year, David earned $10 000 in consultancies for this period. On 30 June 2015, David was also given a dozen bottles of XCoy’s company wine, valued at $500, as an “End of Financial Year” bonus. David also earns $2 000 from the dividends he receives in relation to his shares in XCoy. What is David’s taxable income for the year ended 30 June 2015? Apply 1.2.3.4. and 5. And assess whether David is a resident of Australia under the four tests. Residence 1, Common law test  David always returns to Australia for about 2 months each year (frequency, regularity and duration of visits)  Wife present with him in NZ but children at school in Australia (family ties)  Works overseas most of the time but some limited in-house consultancy in Brisbane (business ties)  Townhouse in Brisbane though leased out for most of the year (maintain property)

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Australian Citizen (nationality) Have been overseas for most of the last 10 years (physical presence outside Australia) Taxation Ruling TR 98/17- general rule that if intended visit less than 6 months, not regarded by the commissioner as “residing” in Australia.

In exam or in assignments, must sit on one side of the fence and say why. Never say a resident of another country and therefore not Australian citizen, and is not subject to Australian tax rules. Stronger argument is that David is a non-resident as his habits show that he has had employment and a home in NZ for the last six years. While he has property in Australia, this is used for his convenience and is not generally available nor is it a regular place where he rests his head. David does have family ties in Australia, but his children are in boarding school and he maintains his relationship with regular visits. 2, Domicile test  David is domiciled in Australia (Australian Citizen). So, question as to whether he has a permanent place of abode outside Australia. Case: FCT v Applegate  IT 2650- Permanent does not mean forever. If taxpayer resides overseas for 2 years or more, likely to have permanent place of abode outside Australia. 3, 183 DAY test- N/A- David not physically present for 183 days per year. 4, Superannuation test- N/A- no evidence of relevant super fund. Assume David is a non-resident of Australia. His ordinary income are as follows: 

    

$300,000 salaries- XCoy (Chinese coy, salaries paid to NZ bank account, assume work carried out in NZ)- Income as regular (case: FCT v Dixon (1952))- but source would be where services performed (case: NZ Cam& Sons) $100 interest – NZ bank account – income- return for use of moneysource: where the bank account is (case: Spotless services) $50,000 rent – Australian property – income- return for right to use property and sourced as place of property (case: Adelaide Fruit and Produce Exchange Co Ltd v DFCT (1932);Rhodesia Metals) $10,000 from consultancy work – Australia – Return for services- income $500 bottles of wine Xmas bonus- Xcoy- could be income as deemed to be money s21 and s15-2 or argue that a Fringe benefit by employer – s23L Source- work in NZ – source would be NZ $200 dividends- Xcoy- Dividends are income s44(1)- would not be sourced in Australia

10 David’s taxable income is income where sourced in Australia, which is the $50,000 rent from property in Australia, and $10,000 from in- house consultancy in Australia. David’s taxable income is $60,000....