Beruflich Dokumente
Kultur Dokumente
6
ASSESSABLE INCOME...................................................................6
Assessable Income...........................................................................................6
Income or Capital? Income According to Ordinary Concepts..................8
Is there a business? .......................................................................................10
Derivation of Income.....................................................................................11
Residency........................................................................................................15
For Individuals: s6(1)(a)...................................................................................................15
For Companies: s6(1)(b)..................................................................................................16
For Trusts.........................................................................................................................17
For Partnerships................................................................................................................17
Source of Income...........................................................................................18
Types of Income:..............................................................................................................18
Statutory Income...........................................................................................20
Non-cash benefits from business relationships................................................................20
Accrued Leave Transfer Payments...................................................................................20
Allowances in relation to employment.............................................................................20
Reimbursed car expenses.................................................................................................20
Defence forces rations and quarters.................................................................................21
Return to work payments.................................................................................................21
Employee Share Acquisition Scheme..............................................................................21
Insurance or indemnity for trading loss............................................................................21
Recoupments....................................................................................................................21
Profit on Sale of Leased Motor Vehicles.........................................................................22
Profit Making Undertakings or Plans...............................................................................22
Work in Progress..............................................................................................................23
Royalties...........................................................................................................................23
Insurance Recoveries on Losses of Live Stock................................................................24
Gains on Disposal of Traditional Securities.....................................................................24
Bounty or Subsidy............................................................................................................24
Interest on overpayment of tax.........................................................................................24
Interest under will, etc......................................................................................................24
Bonus................................................................................................................................24
Recovery of Embezzlement, etc, loss...............................................................................25
Meals provided to clients, etc in In-House dining facilities.............................................25
Receipts from a film.........................................................................................................25
Investment related lottery winnings.................................................................................25
Dividends.........................................................................................................................25
Prizes and Awards............................................................................................................25
Personal Services Income.............................................................................26
Exempt Income..............................................................................................28
Exempt Organisations......................................................................................................28
Exempt Amounts..............................................................................................................29
Overseas Employment Income.........................................................................................30
Foreign branch profits......................................................................................................32
Non-portfolio dividends...................................................................................................32
1
ALLOWABLE DEDUCTIONS......................................................33
GST Implications...........................................................................................33
Business Deductions......................................................................................34
Some Specific Items Deductible Under s8-1................................................37
Travel Expenses...............................................................................................................37
Interest Expenses..............................................................................................................37
Damages and Penalties.....................................................................................................40
Payments and Benefits provided to employees................................................................40
Foreign Exchange Losses.................................................................................................40
Expenses on Commencement and Cessation...................................................................41
Deductions Under Specific Provisions.........................................................42
Repairs..............................................................................................................................42
Payment for non-compliance with a covenant to repair...................................................43
Bad Debts.........................................................................................................................43
Borrowing costs................................................................................................................44
Mortgage Discharge Expenses.........................................................................................45
Expenses relating to lease documents..............................................................................45
Expenses relating to granting of patents..........................................................................45
Pensions, Gratuities and Retiring Allowances.................................................................45
Tax related expenses........................................................................................................47
Subscriptions....................................................................................................................47
Costs associated with meeting GST obligations..............................................................47
Legal Expenses.................................................................................................................48
PLS 2 -66..........................................................................................................................48
Gifts, Pensions..................................................................................................................48
Loss on Disposal or Redemption of traditional securities................................................49
Debt/Equity Swaps...........................................................................................................49
Payments to Related Entities............................................................................................49
Loss by Theft or Embezzlement.......................................................................................50
Expenditure on Research and Development....................................................................50
Mains Electricity Connection...........................................................................................51
Loss from Profit-Making Undertakings or Plans.............................................................51
Superannuation Contributions..........................................................................................51
Environmental Impact Expenditure.................................................................................51
Environmental Protection Expenditure............................................................................52
Commercial Debt Forgiveness.....................................................................53
Non-Deductible Expenses.............................................................................54
Expenditure related to a capital gain................................................................................54
Taxes, charges, penalties or fines.....................................................................................54
Club Fees and Expenditure Relating to Leisure Facilities...............................................54
Entertainment Expenses...................................................................................................55
Employee car expenses....................................................................................................56
Travel expenses of an eligible relative.............................................................................56
Employee car parking expenses.......................................................................................57
Reimbursement of employee’s expenses.........................................................................57
Non-cash business benefits..............................................................................................57
Occupational Clothing......................................................................................................57
Limits on certain deductions............................................................................................57
Self Education expenses...................................................................................................57
2
Anti-Avoidance provisions..............................................................................................58
Employment Deductions...............................................................................59
Specific Deductible Expenses.......................................................................59
Employment Agreements.................................................................................................59
Business association subscription....................................................................................59
Clothing and Laundry.......................................................................................................60
Home office expenses......................................................................................................60
Self-education expenses...................................................................................................61
Motor Vehicle Expenses..................................................................................................62
Superannuation Contributions..........................................................................................63
Prepayments...................................................................................................64
Depreciation and Capital Works.................................................................66
GST related expenses.......................................................................................................70
Computers Hardware and Software.................................................................................70
Deductions for Capital Works......................................................................72
Business Related Cost – Blackhole Expenditure........................................73
Tax Losses......................................................................................................74
Foreign Income Losses.....................................................................................................75
Losses of Previous Years:................................................................................................75
Current year losses...........................................................................................................77
Transfer of Losses............................................................................................................78
Trading Stock................................................................................................80
What is trading stock?......................................................................................................80
Types of trading stock......................................................................................................80
Trading stock – Assessable Income/Allowable deduction:..............................................81
When Is trading stock ‘on hand’......................................................................................82
Trading stock valuation....................................................................................................83
Trading Stock Issues:.......................................................................................................84
Disposal of Trading Stock................................................................................................85
CAPITAL GAINS TAX...................................................................88
What is a CGT Asset?...................................................................................88
Separate Assets.................................................................................................................88
Personal Use Asset...........................................................................................................89
Assets of Non-Residents..................................................................................................90
CGT Events:..................................................................................................90
Which Entity Makes the Gains/Losses........................................................90
Timing of Acquisitions and Disposals:........................................................91
CGT Exemptions and Concessions..............................................................92
Subdiv. 118-A Exemptions..............................................................................................92
Main Residence Exemption.............................................................................................93
Reduction of capital gain otherwise assessable................................................................95
Cost Base and Reduced Cost Base...............................................................96
Capital Proceeds...............................................................................................................96
Cost Base..........................................................................................................................97
Reduced Cost Base...........................................................................................................99
Modifications to Cost Base............................................................................................100
3
Calculation of Gains and Losses................................................................102
NET Capital gains and Losses.......................................................................................102
Discount Capital Gain....................................................................................................103
Capital Gain Averaging Provision – Individuals ONLY...............................................104
Rollovers ......................................................................................................105
Disposal or Creation of Assets in a Wholly Owned Company by Individual or Trustee
........................................................................................................................................105
Partnership Asset Rolled over to Wholly Owned Company..........................................106
Transfer of Assets Between Group Companies in the Same Wholly Owned Group.....106
Small Business Concessions........................................................................109
General Conditions.........................................................................................................109
Small Business 15 Year Asset Exemption.....................................................................111
Small Business 50% Active Asset Concession..............................................................111
Small Business Retirement Exemption..........................................................................111
Small Business Asset Rollovers.....................................................................................113
Transitional Provisions...............................................................................114
Change in Majority Underlying Interest........................................................................114
Sale of Pre-CGT Interest in Interposed Entity...............................................................114
PARTNERSHIPS...........................................................................115
Definition of Partnership............................................................................115
Calculating Partnership Net Income or Loss............................................116
WIP Payments................................................................................................................116
Dividends.......................................................................................................................116
Partners’ Salaries............................................................................................................116
Interest Payments...........................................................................................................116
Superannuation contributions.........................................................................................117
Payments to Relatives and Related Entities...................................................................117
Calculation of Partners’ Taxable Income.................................................117
Change in Partnership Structure...............................................................117
TRUSTEES AND BENEFICIARIES...........................................118
Present Entitlement and Legal Disability.................................................118
Trust Income................................................................................................118
What is Taxed?...............................................................................................................118
Residency and Source....................................................................................................118
Trust Losses.................................................................................................119
Trust Loss Tests ............................................................................................................119
Implications of Family Trusts:.......................................................................................122
Net Income v. Accounting Income.............................................................123
Taxation of Trust Income...........................................................................123
Beneficiary Presently Entitled and No Legal Disability................................................124
Beneficiary presently entitled BUT under legal disability.............................................124
Where no Beneficiary presently entitled........................................................................124
Deceased Estates............................................................................................................125
Receipt of trust income NOT previously subject to tax.................................................125
Distributions out of corpus.............................................................................................125
4
COMPANIES..................................................................................126
What is a Company?...................................................................................126
Public Company.............................................................................................................126
Company Bad Debts....................................................................................126
Tax Losses [also pg 65]................................................................................126
Implications for Shareholders of Dividends.............................................127
Franking Account........................................................................................128
Penalty Taxes.................................................................................................................128
Franking Account returns and assessment.....................................................................130
Deemed Dividends.......................................................................................131
Distributions by a liquidator...........................................................................................131
Loans and Payments by Private companies...................................................................131
Remuneration and Termination Payments.....................................................................131
Off Market share buy-backs...........................................................................................131
FOREIGN INCOME, DEDUCTIONS AND CREDITS.............133
Foreign Income............................................................................................133
Foreign Losses..............................................................................................134
Foreign Tax Credits....................................................................................134
FRINGE BENEFITS TAX (All Sections in FBTAA)..................136
FBT liability calculation.............................................................................136
Rebatable Employers..................................................................................137
What is a Fringe Benefit?...........................................................................137
Car Fringe Benefit.......................................................................................138
Debt Waiver Benefit....................................................................................139
Loan Benefits...............................................................................................139
Expense Payment Benefit...........................................................................140
Housing Benefit............................................................................................141
Living Away From Home Allowance Benefit...........................................141
Car Parking Benefit....................................................................................141
Property Benefits.........................................................................................142
Residual Benefits.........................................................................................143
Entertainment..............................................................................................143
Other Benefits..............................................................................................144
5
CORE SECTIONS
Sec 44(1) Dividends included in assessable income
Sec 207-20(1) Imputation credits included in assessable income – individual and
companies
Sec 6AC Gross foreign income (including withholding tax) included in assessable
income
Sec 79D Foreign deductions are limited to foreign income
Sec 207-20(2) Entitled to an imputation credit tax offset – individuals and companies
Sec 70-35(2) Opening stock > Closing stock = deduction
Sec 207-40(1) Imputation credit gross up and credit – partnerships
Sec 207-40(2) Imputation credit gross up and credit – companies
Sun Newspapers Ltd & Expenses to eliminate the competition are capital
Broken Hill Theatres
Sun Newspapers Ltd Expenses to set up a new market or business are capital
Sec 40-25 Depreciation is deductible
Sec 26-30 Travel expenses for accompanying persons are non-deductible
IT2625 Audit fees not deductible unless incurred – invoices or an agreement or
interim billing
Sec 109 Only a reasonable payment of director’s fees are deductible
S82AAC Superannuation deduction – ABL , paid and complying fund
Sec 43 Capital works after 26/2/92
Sec 165-10 Losses carried forward to reduce taxable income
ASSESSABLE INCOME
Assessable Income
Sec. 4-15 Taxable Income = Assessable Income – Deductible Expenses
Definitions:
Sec 6-1(1) Assessable income is ordinary income and statutory income.
Sec 6-1(2) Statutory income and ordinary income can be exempt income
Sec 6-1(3) Some ordinary income and some statutory income can be neither
assessable nor exempt income.
Sec 6-5(1) Ordinary income is income according to ordinary concepts – assessable
unless exempt or made non-assessable.
Sec 6-10(2) Statutory income is income included in assessable income by statutory
provision (see s10-5 for list of statutory income).
Sec 6-20(1) Exempt income is income made exempt from tax by provision of the Act
(see s11-5 for list of exempt income).
Residency:
Sec 6-5(2) Resident – assessable on ordinary income derived from all sources in or
out of Australia.
Sec 6-10(4) Resident – assessable on statutory income derived from all sources in or
out of Australia.
6
Sec 6-5(3)(a) NR – assessable on ordinary income from sources within Australia.
Sec 6-5(3)(b) NR – assessable on other ordinary income on basis other than being
sourced in Australia.
Sec 6-10(5)(a) NR – assessable on statutory income from sources within Australia.
Sec 6-10(5)(b) NR – assessable on other statutory income on basis other than being
sourced in Australia.
Sec 23(r) Income derived by a non-resident from sources wholly out of Australia is
not assessable in Australia.
7
Income or Capital? Income According to Ordinary Concepts
Eisner v. MacComber Income is ‘fruit’ and capital is ‘tree’ from which fruit is grown.
McCurry & Anor v. FCT Taxpayers who are NOT carrying on a business:
If a profit is made, then it is income if:
The taxpayer entered into the transaction with a profit-making
intention; AND
The transaction was entered into, and the profit was made, in carrying
out a business operation or commercial transaction.
8
FCT v. Dixon Voluntary payment or gift:
Voluntary payment or gift received as incidental to employment is
assessable income
Brown v FCT Gift of unit to former politician was remuneration for services rendered.
IT 167 Windfall gains:
In absence of unusual features, a prize winning will not be assessable.
Compensation Payments:
Liftronic Pty Ltd v. FCT; Amount received as compensation for loss of capital is capital
FCT v. DP Smith Amount received for loss of revenue is income.
McLaurin v. FCT; Allsop If no amount of payment can be identified as income, the entire amount is
v. FCT capital.
Allsop v. FCT If taxpayer has entitlement to a lump sum in full satisfaction of all
entitlements or claims, the payment will be capital in nature.
Whitaker v. FCT Compensation for personal injury is income if in substitution for lost
wages. Otherwise capital.
FCT v. Slaven Compensation for loss of earning capacity is capital.
Barnett v. FCT Motivation of payer is relevant in determining whether receipt is capital or
income.
Recoupment of expenses:
Subdiv. 20-A An amount received:
By way of insurance or indemnity in respect of a loss or outgoing that
9
is or was deductible;
In recoupment of a loss or outgoing that is or was deductible
Is assessable income – assessable in the year of receipt.
Is there a business?
Commercial character:
IRC v. Livingstone; If the activities are carried on in the same way as is characteristic of
McInnes v. FCT ordinary trade in that particular line of business, then business.
View to making profit:
Thomas v. FCT; Ferguson The activities of a business normally undertaken with a view to making a
v. FCT profit.
Scale of business:
Inglis v. FCT The higher the level of activity or the bigger the scale of the activities, the
more likely it will be business.
Systematic and organised:
Evans v. FCT A business should be systematically conducted and organised.
10
Derivation of Income
Carden’s case Cash v. Accruals basis:
The method to be used depends on its ‘actual appropriateness’ and
whether it provides a ‘substantially correct reflex’ of the taxpayer’s ‘true
income’.
11
IT 2503 Sole professional practitioners and small professional firms may record
income on cash basis.
IT 2639 To determine whether a practice can adopt the cash basis, consider:
If practice has at least as many non-principal practitioners as principal
practitioners, then income considered to be derived from business
structure – accruals basis
If fewer non-principal practitioners than principal practitioners,
Commissioner will look at:
Nature of activities
Extent to which income depends on taxpayer’s own skill
and judgement
Extent of income producing assets used to derive income
Number of employees
Constructive Receipt:
Sec 6-5(4) You are taken to have received ordinary income as soon as it is applied or
dealt with in any way on your behalf or as you direct (hence derived it).
Sec 6-10(3) You are taken to have received statutory income as soon as it is applied or
dealt with in any way on your behalf or as you direct (hence derived it).
12
FCT v. Australian Gas Trading Income – when recoverable debt arises:
Light Co & Anor. Trading income is derived when a recoverable debt comes into existence,
ie. taxpayer not obliged to take any further steps before becoming entitled
to payment.
Gasparin v. FCT Where land is sold as trading stock, the proceeds is recognised as income
on settlement, not when contracts become unconditional – debt accrues to
vendor on settlement (from this day, vendor cannot sue for sale price, only
specific performance or damages).
TR 93/11 Professional fees (on accruals basis) – when recoverable debt arises:
If professional accounts income on an accruals basis, income is derived
when a recoverable debt is created – ie. person is not obliged to take any
further steps before becoming entitled to payment.
When recoverable debt arises depends on arrangement with client. Eg.
when client is billed, when work wholly completed, when work done
progressively and payment is due at specific intervals.
13
TR 95/7 Lay-by:
Derived when buyer pays final instalment and goods delivered to
buyer.
If lay-by terminated early, then amount forfeited and any associated
costs which the seller retains is derived when sales is terminated.
For non-refundable service fee, deposit or charge, derived when lay-
by sale entered into.
TR 98/1; TR96/20 Trading stock discount – at time of sale:
When trading stock sold under arrangement which provides for prompt
payment discount, income derived at time of sale for the full invoice
price. If the discount is subsequently accepted, the difference is
deductible at the time that the payment is received.
EXCEPT there must be virtual certainty, in light of past experience and
policy that the discount amount will not be received by trader.
14
Residency
International Tax Treaties overrule to ITAA
For Individuals: s6(1)(a)
Sec 6(1) Rules:
There are 4 tests for determining residency for individuals:
a) “Resides” test
6(1)(a)(i) b) Domicile test
6(1)(a)(ii) c) 183 day test
6(1)(a)(iii) d) Cth Government Super fund test
Resides Test:
IT 2681 For business migrants:
Purpose, frequency, regularity and duration of return trips to country
of origin.
Family and business ties person has in Australia and country of origin
Whether he/she is accompanied by his/her family to Australia and on
return trips to the country of origin;
Whether person is employed in country of origin;
Whether place of abode is maintain in country of origin or is available
for person’s use while there;
Whether personal effects are kept in Australia or country of origin;
Extent to which any assets or bank accounts are acquired or
maintained in Australia and in the country of origin;
Whether the migrant has commenced or established a business in
Australia.
TR 98/17
[NOTE: not for Australian residents returning to Australia after temporary
stay overseas where they remained residents whilst overseas.]
Looks at the quality and character of an individual’s behaviour while in
Australia over a period of 6 months.
Intention or purpose of presence;
Family and business/employment ties;
Maintenance and location of assets; and
Social and living arrangements.
Generally, when behaviour is consistent with residing here is
demonstrated over 6 months, the individual is a resident.
Domicile Test
IT 2650 Domicile is Australia = resident unless person’s permanent place of abode
is outside the country.
For Australians going overseas:
The intended and actual length of taxpayer’s stay in the overseas
country.
Whether the taxpayer intended to stay in the overseas country only
15
temporarily and then to move to another country or to return to
Australia at some definite point in time
Whether any residence or place of abode exists in Australia or has
been abandoned because of the overseas absence;
Whether taxpayer has established a home (ie. dwelling place, house or
shelter that is the taxpayer’s fixed residence) in the overseas country;
Duration and continuity of the taxpayer’s presence in the overseas
country
Durability of taxpayer’s association with a particular place in
Australia, ie. maintaining bank accounts in Australia, place of
FCT v. Applegate; FCT v. education for children, family ties, etc.
Jenkins; Case Q68.
Last 3 factors above given more weighting.
De Beers Consolidated Key factor in locating the central management and control is the place
Mines Ltd v. Howe where the directors meet to manage the company’s affairs.
Esquire Nominees Ltd v. Even if directors are effectively influenced by other parties, if the
FCT directors still have the responsibility for management of the company,
where the director’s meetings are held may remain as key factor.
Koitaki Para Rubber If central management and control is spread between two countries, the
Estates Ltd v. FCT company may be resident in both countries.
John Hood and Co Ltd v. Need to determine who actually exercises central management and control
Magee of company. If shareholders in GM actually exercise central management
and control, then it is the place where this meeting is held.
16
Adelaide Motors Control means actual control and not the capacity to control
For Trusts
S95(2) Resident trust exists if:
A trustee of the trust was a resident at any time during the year; or
The central management and control of the trust estate was in
Australia at any time during the year.
For Partnerships
1936 s92 Impact of Australian laws on partnerships is determined by reference of
each partner and the source of income attributed to them
s90 Partnership net income and loss is calculated on the assumption that the
partnership is a resident
17
Source of Income
Types of Income:
Salary and Wages:
FCT v. French; FCT v. Normally, income is sourced at place where work is performed.
Efstathakis
FCT v. Mitchum BUT if work is of a highly specialised nature or special knowledge, skill
or talent is required to such a high degree, the place where the knowledge
is utilised may be of relatively little importance. Other factors, such as
place where contract is executed is more significant.
Professional Services:
FCT v. Mitchum Sourced at place where services performed. EXCEPT where making of
the contract is more important (see above)
Dividend Income:
Esquire Nominees v. FCT Source is the place where profits out of which dividend is paid were made
(ie. geographical location where income is made).
Sec 44(1)(a) Australian residents include dividends paid out of profits derived from
any source
Interest income:
Spotless Services v. FCT Source is where the loan contract is made or where the funds are advanced
(ie. where obligation to pay arose).
FCT v. United Aircraft Arising from technical knowledge and know-how, then sourced at place
18
Corporation where contract is made and the know-how is provided.
19
Statutory Income
Sec 10-5 Lists the types of statutory income
s21A(1) Any non-cash benefit received from business relationships that are not
convertible to cash are treated as convertible to cash, provided it is
otherwise of an income nature
s21A(2) Non cash benefit is brought to account at (a) arm’s length value reduced
by taxpayer’s contribution
s23L(2) s21A amounts are exempted if less than $300 in a year of income
Sec 15-5 Includes in assessable income an accrued leave transfer payment received
by a taxpayer (new employer).
20
Defence forces rations and quarters
Sec 26(ea) For members of the Defence Forces, required to include allowances
received as assessable income whether it is given in money, goods, meals,
sustenance, use of premises or quarters – UNLESS it is FB or exempt
benefit.
Recoupments
Subdiv. 20-A Includes in assessable income amounts received as recoupment for certain
previously deductible losses or outgoings. MUST BE assessable
recoupment
Sec 20-35(2) Total of amounts of assessable recoupment cannot exceed amount of loss
or outgoing.
21
Sec 20-45 Amount of assessable recoupment reduced where the loss to which the
recoupment relates was deductible in accordance with capital allowance
provisions and a balancing charge has arisen in the current year.
Sec 20-50(1) Total of what you can deduct for a loss is limited to a proportion of the
loss.
Sec 20-130 If there are 2 or more leases of the car resulting in different amounts to be
included in assessable income, include the largest amount.
22
Work in Progress
Sec 15-50 Assessable income includes any WIP progress amounts that you receive.
Royalties
Sec 15-20 Includes as assessable income an amount received as or by way of royalty.
BUT only assessable if:
Fall within ordinary meaning of ‘royalty’ and
Not assessable as ordinary income under s6-5.
Shorter Oxford English a) payment to land-owner for lessee of mine in return for privilege of
Dictionary working it;
b) sum paid to proprietor of patented invention for use of it
c) payment to author, editor, or composer for each copy of a book, piece
of music, etc sold by publisher, or for representation of a play.
McCauley v. FCT Payments received by grantor of a right to remove trees on the basis of
amount of timber cut or removed under a right to do so, the amounts are
receipts ‘as or by way of royalty’.
23
Outbound royalties may be deemed to have a source in Australia.
Traditional security:
include bonds, debentures, bills of exchange, deposits with financial
institutions, loans and repayment contracts purchased after 10/5/89 which:
do not have an eligible return; or
have an eligible return, but return <1.5% of total payments x no. of
years in term of security.
Bounty or Subsidy
Sec 15-10 Assessable income includes a bounty or subsidy that:
a) you receive in relation to carrying on a business; and
b) is not assessable as ordinary income under s6-5
Bonus
Sec 26(I) Amounts received by way of bonus other than reversionary bonus on
policy of life assurance.
24
Recovery of Embezzlement, etc, loss
Sec 26(k); s20-20 & 20-35 Amounts received by way of insurance, indemnity, recoupment, recovery
or reimbursement of losses through embezzlement, larceny, defalcation or
misappropriation by an employee or agent where losses already allowed
as deductions under s71.
Dividends
Sec 44(1) All dividends are assessable to a resident shareholder.
NOTE: applies only to dividends received directly. If received indirectly,
assessed under s6-5 or trust provisions of Div. 6-6AAA.
25
Personal Services Income
Section 84-5 Definition – PSI:
Ordinary or statutory income of taxpayer or of any other entity where
income is mainly a reward for his/her personal efforts or skills.
Only individuals can have PSI
Can arise if income is for doing work or for producing result
Even though income payable under contract, does not stop income
being mainly a reward for person’s efforts or skills.
Sec 87-15 If less than 80% of PSI comes from one source, still treated as conducting
a PSB if at least one of the 3 personal services business tests have been
met:
2) Employment test:
For an individual, test is passed if:
a) the individual engages one or more entities (other than associates of
the entity that are not individuals) to perform the work; AND
b) that entity performs, or those entities perform together, at least 20%
(by MV) of the individual’s principal work for that year.
26
b) that other entity performs, or those other entities together perform, at
least 20% (by MV) of the entity’s principal work for that year.
27
Exempt Income
Sec 6-20(1) Amount of ordinary income or statutory income will be exempt income if
made exempt by a provision of the Act.
Sec 6-20(2) Ordinary income may be exempt if it is excluded from being assessable
income.
Sec 23(r) Exempts from Australian tax income derived by a NR from sources
outside of Australia.
Sec 23L Employment related benefits which are either fringe benefits or exempt
benefits for FBT purposes are treated as exempt income so far as the
employee is concerned.
Sec 118-12 Capital gains and losses do not arise where there is a disposal of an asset
which was used only to produce exempt income, or which was owned
by a taxpayer whose income is totally exempt.
Exempt Organisations
Sec 50-5 Charitable, religious, scientific and educational institutions and
funds.
28
Sec 50-15 & 50-1 Exempts income of employer or employee associations registered under
a Cth, State or Territory law relating to settlement of industrial
disputes and trade unions, whether registered or not (as long as they
are located in Aust and incurs its expenditure and pursues its
objectives principally in Aust.
Sec 50-20 & 50-1 Exempts income of friendly societies that are not carried on for purpose
of profit to individual members and satisfy conditions in s50-70.
Sec 50-25 & 50-1 Exempt income of a municipal corporation or a local governing body,
and of a public authority constituted under a Cth law.
Sec 50-30 & 50-1 Income of public hospital that satisfies conditions in s50-55
Non-profit hospital carried on by a society or association and
satisfying conditions in s50-55
Medical benefits organisation, health benefits organisation and a
hospital benefits organisation which are registered.
All must not be carried on for purposes of profit.
Sec 50-35 & 50-1 Income of Phosphate Mining Company of Christmas Island Limited
and British Phosphate Commissioners Banaba Contingency
Fund.
Sec 50-40 & 50-1 Non-profit society or association established to promote the
development of aviation or tourism, or agricultural,
horticultural, industrial, manufacturing, pastoral, or viticultural
resources in Australia.
Sec 50-45 & 50-1 Sports, culture, film and recreation – Societies and clubs that are not
carried on for purposes of profit or gain to members and satisfy
conditions in s50-70.
Exempt Amounts
Sec 51-5 Allowance or bounty paid to member of Defence Forces.
Sec 51-15 Official salary and non-Australian sourced income derived by Governor
General or State Governor. But still assessable on ordinary and
statutory income derived from source in Australia.
Sec 51-25 Mining payments paid to Aboriginals or distributing bodies are exempt
(they are subject to mining WHT under Div 11C Pt III (36 Act))
29
Sec 51-30 Periodic maintenance payments, rental subsidy payments and open
employment incentive bonus are all exempt from tax.
Sec 51-45 Mining payments to Aboriginals or distributing bodies are exempt.
Sec 51-48 Refunds of State or Territory business franchise fees are exempt if subject
to Cth franchise fees windfall tax.
Sec 51-49 Refunds of State taxes paid on Cth places are exempt from tax if subject
to Cth places windfall tax.
Sec 23AG Foreign earnings derived after 30/6/87 by an Australian resident engaged
in service in a foreign country for a continuous period of not less than
91 days are exempt, PROVIDING:
Foreign earnings are not exempt from tax in foreign country; and
If there is foreign tax liability, the Commissioner is satisfied that it has
been paid or will be paid.
Continuous service:
IT 2441 Services period of 91 days does not have to be measured on a year of
income basis, can overlap year-end.
Sec 23AG(6) Continuity will not be broken by absences due to accident or illness.
Absences on recreation leave does not break it either. EXCEPT where
leave is:
Attributable to employment other than the foreign service;
LSL or similar kind
Leave w/o pay or on reduced pay.
Sec 23AG(6A) to (6E) Provides method to calculate ‘absentee credits’ to determine whether
taxpayer has satisfied the 91 day continuity service period.
PLS 1-163
Sec 23AG(3) Sec 23AG amounts considered when calculating tax payable:
The amount of foreign employment income exempt from tax will be taken
into account in calculating Australian tax payable on other assessable
30
income. [Ref: PLS 1 –163 for formula]
31
Sec 23AG(4) Formula given apportions the deductions between the exempt and non-
exempt income.
NOTE: superannuation deductions and fees paid to prepare Australian tax
returns are NOT apportionable deductions: Norris v. FCT; TD 200/12.
Non-portfolio dividends
Sec 23AJ Non-portfolio dividends paid to a resident company by a company in a
listed or unlisted country to the extent that it is an ‘exempting receipt’
– exempt.
NOTE: PLS 1 -170.
32
ALLOWABLE DEDUCTIONS
GST Implications
Sec 27-1 to 27-30 Exclude GST from deductible amounts to extent of entity’s ITC
entitlement or decreasing adjustment (s27-5).
Deduction for increasing adjustments due to changes in creditable
purpose of the acquisition (other than for adjustments relating to an
increased use of the item for private or domestic purposes) (sec 27-10)
Deduction for increasing adjustments on cessation of entity’s GST
registration as long as the assets is still held for income-producing
purpose (s27-10(3)).
Exclude GST from amounts considered in calculating deductions
Deny deduction for GST payments (s27-15)
Exclude ITC entitlements from outgoing incurred before 1/7/00.
33
Business Deductions
Sec 8-1(1) You can deduct from assessable income any loss or outgoing to the extent
that:
It is incurred in gaining or producing assessable income (all
taxpayers); or
It is necessarily incurred in carrying on a business for the purpose of
gaining or producing assessable income (business taxpayers)
Sec 8-1(2) You cannot deduct a loos or outgoing to the extent that:
It is a loss or outgoing of capital, or of a capital nature;
It is a loss or outgoing of a private or domestic nature;
It is incurred in relation to gaining or producing exempt income;
A provision prevents you from deducting it.
Incurred:
FCT v. James Flood Pty It is not necessary for an actual disbursements to have been made for a
Ltd liability to be incurred. All that is required is that the taxpayer is
definitively committed, or has completely subjected itself to, the
expenditure.
Even though the amount cannot be precisely determined as long as it is
capable of reasonable estimation. (also RACV Insurance Pty Ltd v. FCT)
FCT v. Raymor (NSW) Actual payment of an amount during the year will result in the amount
Pty Ltd being ‘incurred’ in that year.
New Zealand Flax Does not include expenditure which is no more than impending,
Investments Ltd v. FCT threatened or expected.
Coles Myer Finance Ltd v. Where taxpayer has not physically discharged the liability, the amount
FCT; TR 97/7; TR 94/26 will still be incurred provided:
There is a presently existing liability;
The loss or outgoing which arises as a consequence of that liability is
of a revenue character; and
All or part of the loss or outgoing is properly referable to the particular
year in question.
FCT v. James Flood Pty An amount may be incurred even though the debt is defeasible.
Ltd
Coles Myer Finance Ltd v. The expense should be properly referable to the revenue – ie. the period
FCT of time during which the benefit from incurring the loss or outgoing is put
to profitable advantage.
34
Nexus with Assessable Income:
Lunney v. FCT Outgoings must have the ‘essential character’ of an outgoing incurred in
the process of deriving assessable income.
Ronpibon Tin NL; Outgoing must be ‘incidental & relevant’ to gaining assessable income.
Fletcher & Ors v. FCT
AGC; Placer Pacific; TR Outgoings after business has ceased: In order for the outgoing to be
2000/D3 deductible, the occasion of the outgoing must be found in those income
earning activities (ie. is the loss still incurred in relation to the income
earning activities? Taxpayer bound to pay liabilities after the fact which
arose due to the activities)
FCT v. Brown Where taxpayer incurred unavoidable costs arising out of transactions
entered into in the course of business, these costs will still have the
necessary nexus after the business has ceased.
TR 2000/D3; Steele’s case Outgoing before business commences: Outgoings and losses will be
deductible provided:
They were not incurred ‘too soon’, ie. not preliminary to the income
earning activities
Expense is not private or domestic
Period of outgoings prior to derivation of relevant income is not so
long, taking into account the kind of income earning activities
involved, that the necessary connection between outgoings and
income is lost.
Expense incurred with the view of gaining or producing assessable
income
Continuing efforts are undertaken in pursuit of that end.
Commr of IR (NZ) v. The Commissioner’s concern is only that the necessary nexus to the
Europa Oil (NZ) Ltd production of income exists. As long as it exists, it is irrelevant that it was
extravagant or could have been done in a less costly manner. The
Commissioner must accept the decisions made by the taxpayer even if the
expenses were incurred with poor judgement.
Capital Nature:
British Insulated & Helsby Enduring Benefit test: if an expenditure is made once and for all and
Cables Ltd v. Atherton with a view of bringing into existence an asset or an advantage for the
enduring benefit of a trade, it will be capital.
NAB Ltd v. FCT Once and for all test: capital expenditure is a thing that is going to be
spent once and for all. Income expenditure recurs every year.
Sun Newspaper Ltd v. Business entity test: Expenditure in establishing, replacing and enlarging
FCT the profit yielding structure is capital. There needs to be 3 elements:
The character of the advantage sought – is it a fixed capital asset or an
enduring benefit for the organisation or profit earning subject that is
35
sought? Or is it in the nature of circulating capital, turned over or
consumed in running the business?
The way in which the asset or advantage is used – is it an element in
the profit yielding structure or part of the profit earning process?
How was it acquired – by capital or revenue payments.
36
Some Specific Items Deductible Under s8-1
Travel Expenses
Payne v. FCT Allowed deduction for travel if part of the business is conducted at the
taxpayer’s residence and travel is from that place to another place
where the business is being carried out.
S26(3) Where expenses are incurred in providing a fringe benefit, they are
deductible in full
Case R2 84 ATC Costs can be apportioned on a marginal basis, rather than 50/50
Ure v. FCT; TR 95/25 The test of deductibility requires looking at the essential character of the
interest. Look at:
Character of taxpayer’s undertaking or business;
Objective purpose of the borrowing;
Nature of the transaction or series of transaction of which the
borrowing of funds is an element
Subject purpose (sometimes)
37
TD 93/13 Choice of property used for security irrelevant:
Interest incurred on loan to acquire an income producing property is
fully deductible even though loan is secured over non-income producing
property – eg. family home.
Steele’s case Where funds have been used to acquire capital assets, the fact that the
cost of the asset is not deductible under s8-1 does not mean that the
interest is not deductible. If the asset is used for income producing
purposes, the cost of the asset is capital, but the interest payments are
recurrent revenue items.
38
business use.
Sec 67AAA Financing costs (incl. interest) re loans or other financing arrangements
entered into after 18/8/92, where moneys were used to make super
contributions otherwise than on behalf of employees not deductible.
39
Ilbery’s case Prepayment for interest denied where the dominant purpose was to
reduce tax and for no other purpose
Damages and Penalties
Herald & Weekly Times v. Damages and costs incurred were inseparable from the income
FCT producing activity and the thing which produced the assessable
income was the thing that exposed the taxpayer to the liability
which was discharged by the expenditure – therefore deductible.
Magna Alloys Pty Ltd v. Damages and penalties paid in connection with the way the business is
FCT conducted is deductible.
Sec 26-5 Prohibits deduction for any penalty or fine imposed by law.
Retiring allowance:
Sec 8-1 A retiring allowance, whether in lump sum or pension form and whether
paid to an employee or associates, is deductible ONLY if it can be
shown to be in the future interests of the business (eg. to promote greater
efficiency or economy in the carrying on of the income producing
activities).
Excessive remuneration:
Sec 26-35 If taxpayer makes a deductible payment to a relative or to a partnership
in which he/she is a partner, the taxpayer can only deduct a reasonable
amount.
40
Forex losses of a capital nature may be deductible under Div 3B, Part III
(ITAA 97).
Sec 82Z
Currency exchange loss incurred by a taxpayer in a year of income
under an eligible contract is an allowable deduction in that year of
income.
Cessation:
Payments incurred in closing down business not deductible.
41
Deductions Under Specific Provisions
Repairs
Sec 25-10(1) Can deduct expenditure incurred for repairs to premises or plant which
was held or used solely for purpose of producing assessable income.
Sec 25-10(2) Can only deduct expenses to the extent that it relates to the property or
plant being held or used for income producing purposes.
W Thomas & Co Pty Ltd Repair involves restoration of a thing to its former condition without
v. FCT changing its character.
Lindsay v. FCT; A repair which constitutes replacement of the entirety is not a repair.
Rhodesian Railways Ltd v.
ITC; WG Thomas & Co
Pty Ltd v. FCT
Improvements:
FCT v. Western Suburbs Improvements go beyond restoration of original use and function of item
Cinemas Ltd and so are NOT repairs. If enhances the item beyond original function
and use, then improvement. Key factors:
a) whether thing replaced or renewed was major and important part of
the structure of the plant, premises
b) whether work done did more than meet need for restoration of
efficiency and function
c) whether thing was replaced with new and better one;
d) whether new thing has considerable advantages over the old one,
including advantage that it reduces likelihood of repair bills in future.
42
WG Thomas & Co Pty Ltd Where item subjected to a repair is acquired in condition that requires
v. FCT repair prior to use is considered as part of the cost of acquisition, not a
cost of maintenance.
[NOTE: informal ATO measure of initial repair is repair done within 12
months of acquisition.]
Odeon Associated IF, expenditure incurred for initial repairs where repairs are effected
Theatres v. Jones subsequently to an item in workable but poor condition – deductible.
BUT if incapable of being put to commercial use without immediate
repair, then capital.
TD 98/19 Initial repair expenditure may be included in the cost base of the asset for
CGT purposes under s110-25(5) or 110-55(2).
Bad Debts
Sec 25-35(1) Can deduct a debt written off as bad in the income year if:
The debt is written off in the income year in which the deduction is
claimed; AND
The bad debts have been brought to account by the taxpayer as
assessable income of any year; OR
Debts are in respect of money lent in the ordinary course of taxpayer’s
business of money lending.
43
Conditions:
Point v. FCT; GE Crane Debt must have existence, as a legal or equitable claim.
Sales Pty Ltd v. FCT Must be ‘bad’.
Must be written-off in the year claimed.
Borrowing costs
Sec 25-25(1) Expenses incurred in borrowing money for income producing purposes
are deductible over term of loan or 5 yrs, whichever is shorter (per
s25-25(5)).
S25-25(3) Apportionment:
If borrowing is only used partly for purpose of producing assessable
income, the deductible amount is based on proportion of funds used for
income producing purpose.
44
2-80)
Sec 25-25(6) Cost less than $100 per year:
If borrowing expenses incurred in any one year does not exceed $100,
they are deductible in that year.
Apportionment:
Sec 25-30(3) Where money or property was only partly used to produce income, the
deduction will be apportioned.
Sec 25-30(3) Section will not apply if some other provision applies to allow deduction,
eg. s8-1.
Sec 26-55 Deduction under s25-50 not allowed if it will result in the taxpayer
45
carrying forward a tax loss.
46
Tax related expenses
Sec 25-5(1) Can deduct expenditure relating to:
Managing tax affairs
Complying with an obligation imposed by a Cth law re tax affairs of
an entity
Interest under s170AA – underpayment of tax or s207A – late
payment of tax.
Subscriptions
Sec 25-55 Can claim a deduction for subscriptions to a trade, business or
professional association where section 8-1 does not apply.
Claim is limited to a max. of $42.
TR 2000/17 If you can claim under s8-1, it is not limited to $42. This will also not
count towards your $42 limit.
Sec 25-80 Small to medium sized businesses (ie. turnover <$10m) that are registered
for GST before 1/7/00 are entitled to an immediate deduction for the cost
of acquiring or upgrading plant or software between 1/7/99 and 30/6/00 to
meet GST obligations. Must be installed and ready for use before 1/7/01.
47
Legal Expenses PLS 2 -66
S25-25 Certain borrowings of money –deductible
S25-30 Discharging of certain mortgages
S25-20 Preparation of leases
S86A Grant of registration or extension of patents, designs and copyrights
Hallstroms Pty Ltd Need to consider the reason for which the legal expenses were incurred
(not the end result – eg. may put you out of business, but if it was
incurred to defend something arising out of day to day operations,
then deductible).
Capital or Income?
Magna Alloys & Research Legal expenses which arise out of activities in the ordinary day to day
Pty Ltd v. FCT business operations will generally be on revenue account and deductible
under s8-1.
John Fairfax and Sons Pty Where expenses relate to the profit yielding structure of the business, the
Ltd v. FCT outgoings will be capital in nature and not deductible.
FCT v. Snowden & Even where the legal fees arise because of an unusual set of
Willson Pty Ltd circumstances, if they relate to the manner in which the business is
conducted, they will be deductible.
Expenditure incurred to vindicate business methods is properly to be
regarded as being on revenue account.
TR 2000/5 Legal costs re hiring staff and establishing employment agreements are
deductible, UNLESS it is part of setting up the business. Outgoing for
legal expenses in resolving employment disputes are deductible.
Gifts, Pensions
Division 30 (97); s78 (36) All taxpayers can deduct individual gifts of $2 or more made during the
year to certain nominated funds, institutions or bodies or classes of
them.
48
Sec 30-200 Valuation of property gift:
Valuations must be in writing and must state the estimated value of the
property at the time the gift was made OR provided that the valuation is
made within 90 days of gift, the value at time of valuation.
Political parties:
Sec 30-15, item 3; TD Deduction allowable for gift to a Registered Political party as long as the
92/114 taxpayer is not a company. This includes membership subscriptions.
Sec 30-15, item 3 Annual limit for deductions for political party donations is $100.
Sec 70B(2) Where taxpayer disposes of a traditional security or redeems it, the
amount of any loss on disposal or redemption is deductible.
Debt/Equity Swaps
Sec 63E(3) Where taxpayer has outstanding debt due from debtor which is a
company, trading trust or public unit trust, an allowable deduction
may arise where taxpayer agrees to extinguish debt in return for non-
redeemable shares or units in debtor.
Deduction is allowable for the swap loss where the debt is greater than the
equity value of the shares or units.
[NOTE: debt forgiveness issues]
49
exempt income in hands of recipient: s26-35.
For a partnership:
Relative of a partner
Director/shareholder of a company that is a partner
Relative of a director/shareholder of a coy that is a partner
Beneficiary of a Trust that is a partner or a relative of such B
Another ptsp if partner in this other partnership is a relative of a
partner in the first partnership.
Deduction factor:
Sec 73B(14) If total R&D expenditure exceeds $20,000, the deduction acceleration
factor is 125% for eligible R&D expenditure incurred after 20/8/96.
Sec 73B(14A) Interest incurred after 23/7/96 in financing R&D activities is deductible at
100% and not 125%.
50
Sec 8-1 Deduction under s8-1
Expenditure on R&D may be deductible under s8-1 if it is both relevant
and incidental to the income producing activities of the business and is not
of a capital nature (eg. high-tech industries or R&D on products which are
trading stock of business).
Sec 25-40(2) EXCEPTION – cannot deduct if loss arises in respect of sale of property
acquired after 20/9/85.
Superannuation Contributions
Sec 82AAC(1) Where:
a) a taxpayer makes a contribution to a fund for the purpose of making
provision for super benefits payable for an eligible employee; AND
b) the fund is a complying superannuation fund
the amount is deductible
NOTE: the contributions must actually be made, cannot be merely set
aside.
51
Environmental Protection Expenditure
Sec 400-55 Deduction for expenditure incurred for sole or dominant purpose of
carrying on an environmental protection activity.
52
Commercial Debt Forgiveness
[Refer to Companies section for Companies debt forgiveness]
Sec 245-25 What is a commercial debt?
Commercial debt if interest payable on the debt is, was, or will be an
allowable deduction to the debtor.
Where interest is not payable, the debt will be commercial debt where,
had interest been charged, it would have been deductible.
Sec 245-40 DOES NOT APPLY if forgiveness effected under will or an Act relating
to bankruptcy or for reasons of love and affection
53
Non-Deductible Expenses
Expenditure related to a capital gain
Sec 51AAA Where expense would not have been deductible but for the capital gain
being included in assessable income, the expense is not an allowable
tax deduction.
Sec 26-20 Charges related to HECS are not deductible except where HECS
payments constitute the provision of a fringe benefit: s26-20(2)
54
Sec 26-50(2). What is a leisure facility?
Land, building or part of a building or other structure, used for holidays or
recreation.
Sec 26-50(3) EXCEPT: if at all times during the year, the facility is held:
for sale in ordinary course of business of selling leisure facilities; or
mainly to provide it:
in ordinary course of business of providing leisure facilities
for payment; or
produce income in nature of rents, lease premiums, licence
fees or similar charges; or
for employees to use; or
for care of employee’s children.
Sec 26-50(5)
EXCEPT: for a boat, deductions available, if at all times during year, it is:
held as trading stock in ordinary course of business;
used mainly for letting it on hire in ordinary course of business;
used mainly for transporting for payment in ordinary course of
business;
used for a purpose that is essential to the efficient conduct of a
business carried on by taxpayer.
Entertainment Expenses
Sec 32-5 If outgoing or loss is incurred in respect of providing entertainment, it is
NOT deductible under s8-1.
55
c) when is the food or drink being provided? If provided during work
time, overtime or while travelling, less likely to be entertainment.
d) Where is the food or drink being provided? On employer’s business
premises, usual workplace of the employee OR some function room,
hotel, restaurant?
IT 2675 Light meals are not within the entertainment provisions if only
sandwiches or other ‘hand food’, salads, orange juice are provided and
consumed on taxpayer’s premises.
Sec 32-15 Property used for entertainment:
Where property used for purpose of, or in connection with, the provision
of ‘non-deductible entertainment’, property will be taken as not being
used for purpose of producing assessable income to the extent it is
provided for entertainment.
56
travel expenses of relative.
Sec 51AJ Deduction denied to employee for his contributions to the private element
of a benefit subject to FBT.
Occupational Clothing
Div. 34 Expenses incurred by employees not deductible in relation to non-
compulsory corporate wardrobes or uniforms unless design of the
uniform is entered on the Register of Approved Occupational
Clothing at the time the expense was incurred.
TR 98/9 The $250 must be expenses of self-education, but need not be deductible
under the general deduction provisions.
57
Expenses that are deductible under provisions other than s8-1 are also
taken into account in the s82A calculation.
Anti-Avoidance provisions
Sec 82KJ Losses and outgoings incurred under certain schemes whereby a taxpayer
or his associate acquired property are denied where:
Outgoing was incurred after 19/4/78 under a tax avoidance agreement
Amount of loss was greater than amount that could reasonably be
expected to have been incurred at the time had there been no
agreement
Property has been or will be acquired by the taxpayer under the
agreement
Consideration payable in respect of the property was less if the
outgoing had not been incurred.
58
Employment Deductions
Sec 8-1; FCT v. Wilkinson It is not necessary for employee to show that the expenditure was incurred
as an express or implied condition of employment. It will NOT be
deductible if:
Amount is preparatory to earning income and does not arise in the
course of earning income;
Amount is capital in nature
It is private in nature
It is domestic.
Not deductible:
Costs of drawing up employment agreement with new employer
Re-employment with an employer following termination of a fixed
term employment agreement which has no provision for renewal or
extension, costs of drawing up an employment agreement.
TR 2000/7 Deductible:
Membership subscriptions – where principal activities of association
are relevant to taxpayer producing or gaining assessable income.
Levies and other contributions – as long as the purpose for which they
are made is clearly linked to activities by which taxpayer earns
income.
59
Not deductible:
Joining fees
Payments to, or to assist, a political party;
Payments to provide overseas relief
Payments to assist families of employees suffering from financial
difficulties as result of employees being on strike or having been laid
off
Payments by elected salaried trade union officials into a general fund
for election of officials.
When is it deductible:
TR 94/22 See whether the clothing expenditure has the ‘essential character’ of an
outgoing incurred in gaining or producing assessable income.
TR 98/5 Laundry:
Claim deduction for washing, drying or ironing clothes which are:
Compulsory uniform/wardrobe
Non-compulsory uniform/wardrobe
Occupation-specific clothing; or
Protective clothing.
60
alternative place of work available for taxpayer to conduct her
business? Swinford’s case.
NOTE: if home is place of business, then CGT will apply to gain or loss
arising when the home is disposed of to the extent that it was used to
produce income.
Self-education expenses
Sec 8-1; TR 98/9 Self-education expenses are deductible under sec 8-1 where the expenses
have the necessary connection with the production of the taxpayer's
assessable income.
61
deductible (Finn (1961)).
Where a new or further qualification is sought, there must be at least a
high degree of probability that it will lead to an increase of earnings if
the cost is to be deductible (Hatchett).
However, the qualification need not necessarily have to give rise to an
increase in salary (Smith). It will not be sufficient simply to establish
that the employer has encouraged the employee to undertake the self-
education. If the taxpayer is not currently occupied or employed in an
area which makes the study necessary or desirable, it seems that the
cost is not deductible.
Deductions:
TR 98/9 Allowable deduction where:
Relevant connection to taxpayer’s current income earning activities
If income earning activities are based on some skill or specific
knowledge and the object of self-education is to maintain or improve
the skill or knowledge, then deductible
Not deductible:
No deduction is allowable for self-education expenses where the study is
to enable a taxpayer to get employment, to obtain new employment or
to open up a new income-earning activity (even in the taxpayer's
present employment) (FCT v. MI Roberts)
cost of meals purchased by a taxpayer while attending a course at an
educational institution unless the taxpayer is required to sleep away
from home.
HECS payment per s26-20
Expenditure on accommodation and meals where taxpayer travelled to
another location for self-education and has established a new home.
Limits on deduction:
Section 82A A deduction is not available in respect of the first $250 of certain
kinds of self-education expenses.
TR 98/9 HOWEVER: Deductions for expenses that do not come within the
definition of ''expenses of self-education'' and deductions under other
specific deduction provisions will count in the $250.
62
FCT v. Collings; FCT v. Generally not deductible even where:
Wiener; Gaydon v. DFCT Travel allowance received;
Incidental tasks are performed en route
Travel is outside normal working hours;
Involves a second or subsequent trip.
MT 2027 Will be deductible when:
Travel to client’s premises and then to work (but employer has a
regular place of employment and travels to it habitually; in the
performance of duties of employment, travel is undertaken to an
alternative destination which is not a regular place of employment;
journey is undertaken to location at which employee performs
substantial employment duties).
Carrying bulky equipment to work when it is requirement that
equipment be stored at home (FCT v. Vogt)
Where employment starts prior to leaving home (FCT v. Collings)
Itinerant Traveller:
If nature of work of taxpayer is itinerant, then travel from home to work
deductible, ie.:
Travel is fundamental part of employee’s work
Employee has no fixed place of work
Employee continually travels from one site to another.
Superannuation Contributions
Sec 82AAT Contributions by an eligible person deductible when:
Contributing to complying super fund or RSA to obtain super benefits
for person or dependants of person in event of death;
Written notice in approved form provided to fund trustees or RSA
provider stating intention to claim deduction and has received
acknowledgment.
63
Prepayments
Sec 82KZM Any taxpayer incurred deductible expenditure under an agreement entered
into after 25/5/98 but before 21/9/99 in return for services of any kind
which were not to be wholly provided within 13 months of date of
expenditure then timing rules will apply to the deduction of the
prepayment
64
Prepayments by small business taxpayers:
Sec 960-335; 960-350 Small business taxpayers include persons or entities with an average
annual turnover of less than $1m
65
Depreciation and Capital Works
S40-25(1) You can deduct an amount equal to the decline in value for an income
year of a depreciating asset that you held for any time during the
year:
− Must be a ‘depreciating asset’
− Must be ‘held’ by the taxpayer
− Must be used for a taxable purpose or must be installed ready for use
for that purpose
S40-25(7) Taxable purpose
− Purpose of producing assessable income
− Purpose of exploration or prospecting
− Mining site rehabilitation
− Environmental protection activities
Sec 40-40 Held
PLS 6-2
Plant or Articles:
Yarmouth v. France Plant or articles does not include any part of the setting or environment
within which the income producing activities are carried out.
Distinguish the apparatus used for carrying on income-producing
operation (plant) from items merely functioning as part of general setting
for the income-producing activities (not plant)
J Lyons & Co Ltd v. The See whether item relates to setting in which business is carried on or part
Attorney General of the apparatus used for carrying on the business.
Wangaratta Woollen Mills Is the item in the nature of a tool which plays an integral part in the
Ltd v. FCT production process?
66
Sec 42-105(1) Work out effective life by estimating how long it can be used by any
entity for income producing purposes – do it at time of first use or
installed ready for use.
Adjustments to cost:
After cost has been determined, may need to adjust due to:
Sec 42-75 plant being acquired under non-arm’s length transaction
Sec 42-90 another taxpayer has previously claimed depreciation deductions for
the plant
67
Sec 42-80 cost of car > car depreciation limit
Sec 42-70 cars acquired at discount under certain schemes to avoid car
depreciation limit
Sec 42-85 part of plant’s cost is deductible under some other provision
Sec 42-82 lessor is treated as quasi-owner under s42-312 acquires plant under a
sale and leaseback agreement
Sec 42-70(1) Where the cost of the car must be increased, eg. when the car is acquired
at a discount – ref p 5-9
Rate of Depreciation:
Pre 21/9/99 plant:
Sec 42-125(1) There are general rates for plant acquired between 27/2/92 an 21/9/99
which can be used
Sec 42-120(2) Must choose rate of depreciation to be used for the income year in which
a depreciation deduction is first allowable to the taxpayer.
68
before 1/7/95, AND:
which have an effective life of at least 33% 50%
5 years; or
are an eligible motor vehicle or
eligible artwork
69
Disposal of Asset:
[NOTE: generally, termination value = sale price – expenses of sale]
Where termination value (s42-205 definition) < written down value:
Sec 42-105(1) Can deduct an amount if the termination value of plant < undeducted cost
(depreciated value)
Sec 42-105(2) The amount you deduct is the difference between the two amounts.
Sec 42-290 Balancing adjustment can be offset against replacement plant if acquired
within 2 years of end of income year during which the balancing
adjustment event occurred.
Plant upgrades:
Sec 25-80(1) Expenditure entirely deductible if conditions above satisfied.
Computers Hardware and Software
Div 46 Allows depreciation deduction over 2.5 years for expenditure incurred in
acquiring, commissioning or developing software after 11/5/98.
70
Immediate deduction for software:
Sec 46-65 Total expenditure on acquiring, developing or commissioning software is
$300 or less provided total cost of all purchases of identical software does
not exceed $300 in a year.
Sec 46-70 For software projects (commissioning or developing in-house) which are
abandoned before software is used or installed ready for use.
Depreciation of software:
Sec 46-35 The prime cost method must be used
Sec 46-55 Balancing adjustment even occurs if the software permanently ceases to
be used or installed ready for use.
Development of website:
TR 2000/D6 Cost of acquiring, developing or constructing a website is ‘expenditure on
software’ under Div 46.
Depreciable over 2.5 years over a period where the website is used as part
of a commercial venture carried on for the purpose of producing
assessable income.
71
Deductions for Capital Works
Sec 43-10(2) For a capital works to be deductible:
the capital works must have a ‘construction expenditure area’;
there must be a ‘pool of construction expenditure’ for that area; and
the taxpayer uses the taxpayer’s capital works area in a deductible
way.
What is deductible?
Sec 43-15(1) A portion of your construction expenditure. BUT cannot exceed the
amount of undeducted construction expenditure.
Sec 43-25(2) For pre 26/2/92, rate of deduction is 4% for capital works used in
deductible way if capital works started after 21/8/84 and before
16/9/87.
In other cases, rate of deduction for pre 27/2/92 is 2.5%.
72
“4% manner”:
Sec 43-145 Table under section – applies only to capital works that are buildings
started after 26/2/92. Ref. P 5-27
73
Tax Losses
Sec 36-10 Tax Loss = Deductions (other than c/f losses) – Assessable Income – Net
Exempt Income
For Non-residents:
Australian sourced exempt income
– excluded exempt income (defined in s36-20(3), ref pg. 7-2)
– exempt income subject to WHT (per s128D)
+ s26AG (film proceeds) exempt income – exempt income subject to
WHT
– non-capital losses incurred in deriving exempt income
– non-Australian taxes on s26AG income.
Sec 36-15(5) If have 2 or more tax losses, deduct them in order in which they were
incurred.
Sec 36-15(6) Tax loss can be deducted only to extent that it has not already been
deducted.
Sec 36-15(7) If cannot deduct all or part of your tax loss in an income year, can carry
forward to the next income year.
Sec 375-820 If more than one class of loss incurred in one year, can deduct against
future income in following order:
film losses incurred in 89/90 and subsequent years (but only against
film income)
primary production losses incurred before 89/90 year
general domestic losses (includes primary production losses) incurred
in 89/90 and subsequent years.
74
Foreign Income Losses
Sec 79DA Domestic losses can be offset against foreign source income at choice of
taxpayer.
Sec 79D Foreign deductions are quarantined against foreign source income of same
class
Sec 160AFD(2) & (7) Foreign income loss incurred after 1989 income year can be carried
forward indefinitely for recoupment against assessable foreign income at a
later year.
Sec 160AFD Foreign loss can only be applied against foreign income of same class.
Foreign income categorised as:
interest income
modified passive income
offshore banking income and
all other assessable foreign income.
Sec 160AEA(1) Passive income is:
dividends, unit trust distributions, interest income, annuities, rental
income, royalties, assignment receipt, profits of capital nature, etc
Sec 160AEA(2) Modified passive income is:
Passive income excluding interest income.
75
Sec 165-15 For income years prior to 21/9/99:
Test only had to be satisfied in both income and loss year, NOT
intervening period.
Sec 165-210(1) The company satisfies the same business test if throughout the same
business test period, it carries on the same business as it carried on
immediately before the test time. (refer to p7-9 – steps to work it out)
Test period: the period throughout the income from the time immediately
before the change in ownership.
76
Mere existence of an intention or power to carry out certain business
activities irrelevant.
Mere change in process by which business is carried on does not mean
the test is failed.
Expansion or contraction of the business does not necessarily result in
change of business – therefore, organic growth through adoption of
new compatible operations in the ordinary way, or discard of old
operations may not fail test BUT sudden and dramatic change brought
about by loss or acquisition of business operations on a considerable
scale is likely to change the business
Discontinuance of a significant part of the business by cessation or
sale or commencement or acquisition of new undertakings – may fail.
Where company’s activities have wound down to the extent that
company is not in fact carrying on business
Continuity of name of company
Continuity of location
Existence of periods of dormancy, reasons and reasons for resumption
TR 1999/99 Continuity of custom and goodwill
77
tax benefit or advantage.
IF it applies, current year losses not considered when calculating taxable
income.
When is there a change of ownership that will trigger the section?
Sec 165-35 Rules will apply UNLESS:
There are persons who had more than a 50% stake in the company
during the whole of the income year; OR
There are persons who had more than 50% stake in company for first
part of year, but company satisfies same business test for rest of the
year.
Transfer of Losses
Conditions for grouping a loss:
Sec 170-5(1) Transfer must be from one company to another company
Sec 170-5(3) Transfer must be ‘surplus’, ie. transferring company cannot use it as not
enough income to offset it. The other company must have enough income
to offset the transferred losses.
Sec 170-5(4) Neither company must be prevented from deducting the loss by Div 165
or 175
Sec 170-5(5) Tax loss transferred by an agreement between the two companies.
Sec 170-30(2) Both companies must be members of same wholly-owned group during
whole or part of those income years when both were in existence.
78
Sec 170-35(1) Loss company must be:
An Australian resident and not a prescribed dual resident; and
Must not be a dual resident investment company in either loss year or
deduction year.
Sec 170-35(2) If loss year and deduction year are the same, it must be that the loss
company was not required to calculated tax loss under:
Sec 165-70 (change in ownership); or
Sec 175-35 (injected income or deductions)
Sec 170-35(3) It must be that loss company would not have been prevented from
deducting the tax loss in the deduction year itself if it had enough
assessable income to offset it.
Sec 170-40(2) The income company must not be prevented by Div. 165 or 175 from
deducting the transferred amount in the deduction year.
Sec 170-45(2) Amount transferred cannot exceed amount which the income company
can use.
Sec 170-55(1) If loss company has two or more tax losses that it can transfer in the
deduction year, it can transfer them only in the order of them being
incurred.
Sec 170-60 Income company cannot transfer a loss which was transferred to it.
79
TRADING STOCK
Trading Stock
What is trading stock?
Sec 70-10 Trading stock includes anything produced, manufactured or acquired that
is held for the purposes of manufacture, sale or exchange in the ordinary
course of business AND livestock.
All States Frozen Foods Items become trading stock when taxpayer is in a position to dispose of
Pty Ltd v. FCT them.
80
TR 98/8 Materials and Spare Parts:
Trading stock if:
Taxpayer is or will be carrying on a business providing services to
customers for reward; and
Materials or spare parts are supplied by taxpayer to customer in the
course of, and as an essential part of, performing the service; and
Materials or spare parts are separately identifiable things before and
after the services are provided which retain their individual character
in nature, ie. not used up significantly
Materials and spare parts are disposed of to customer.
Guinea Airways Ltd v. Generally, spare parts held for repair and maintenance are not trading
FCT stock.
Land:
St. Hubert’s Island Pty Ltd Land can be trading stock in the hands of a property developer.
v. FCT
Sec 70-35(2) Assessable income = Closing stock value – Opening Stock Value
Sec 70-35(3) Allowable deduction = Opening stock value – closing stock value
81
When Is trading stock ‘on hand’
FCT v. All States Frozen Stock may be on hand even though taxpayer does not have physical
Foods Pty Ltd possession. The stock on hand is that which has been delivered, or goods
in transit provided title has passed to taxpayer.
Farnsworth v. FCT Key test for whether stock is on hand is whether the taxpayer has
dispositive power over the stock – ie. power to dispose of the stock. If
the taxpayer has the power, then it is trading stock, this is even so if
the power to dispose has been invested in an agent.
BUT even if the taxpayer stills owns the stock, if the power to dispose
does not exist, it will not be ‘on hand’.
Sutton Motors When item is held for sale or exchange, the fact that the taxpayer does
not own it or has not paid for it, will not preclude the item from being
stock on hand of the taxpayer.
All States Frozen Foods Taxpayer who has property in stock, normally has the power to
dispose of it.
Goods in transit will be stock on hand of taxpayer if the taxpayer has
the power of disposal (also IT 2670)
Gasparin v. FCT Land:
Land will remain trading stock on hand until settlement – it is then
that the seller finally loses all dispositive power and the contingency
that the sale will not proceed is gone.
TR 95/7
Lay-by sale agreement:
Trading stock on hand of seller as seller still has possession.
Goods on consignment:
IT 2472
where goods on consignment delivered to agent for sale on behalf of
consignor as principal – goods remain trading stock of consignor.
Where goods are delivered to the consignee on approval, or on sale or
return, and the consignment involves sale of the goods to the
IT 2670 consignee – goods are trading stock on hand of the consignee.
If an agent is used to dispose of stock on behalf of taxpayer, goods will
still be stock on hand of taxpayer, even though agent has physical
possession of the stock.
82
Goods delivered to purchaser under conditional contract – purchaser
has both property in and physical possession of the goods – trading
stock on hand of purchaser.
Purchaser returns goods to seller before year end – property in and
physical possession of goods back to seller – trading stock on hand of
seller.
Sec 70-40(2) The value of trading stock on hand is nil if the item was not taken into
account at the end of last year.
Australasian Jam Co Pty Basis for valuation can change from year to year as long as the opening
Ltd v. FCT stock must equal the closing stock of the previous year. ALSO identical
items can be valued using different methods.
Sec 46(7A) Where it is evident that one of the company’s purpose in exercising an
option to give a higher closing value to trading stock is to increase the
inter-corporate dividend rebate, the Commissioner is authorised in
calculating the rebate to calculate it as if an option to value the trading
stock at the lowest possible value was exercised by the taxpayer.
GST implications:
In working out the cost, market selling value or replacement cost of
trading stock (other than an item which cannot be taxable supply) at end
of year, disregard the ITC you would be entitled to if:
a) you had acquired the item at that time; and
b) the acquisition had been solely for a creditable purpose.
83
became part of trading stock on hand.
IT 2350 The manufacturers will need to use a full absorption costing method if
they choose the cost valuation method. There are 3 elements to be taken
into account – material costs, direct labour costs and production overhead
costs. (Refer pg 8-12 for examples)
Australasian Jam Co Pty the market selling value contemplates a sale in the ordinary course of
Ltd v. FCT business, not as a result of the most disadvantageous sale (eg. forced
sale).
Replacement Price:
Parfew Nominees Pty Ltd Only use if replacement items are in fact available in the market and these
v. FCT; TD 92/198 are substantially identical to the replaced item.
TD 92/198 Replacement price is the amount which the taxpayer would have to pay in
his buying market in order to replace a substantially identical item.
Sec 70-30(1) If you start holding as trading stock an item you already own:
a) just before it became trading stock, the taxpayer is treated as if it had
been sold to someone else for whichever amount is elected:
cost of item; or
market value just before it became trading stock AND
b) the taxpayer immediately bought it back for the same amount.
84
Section does not apply if you start holding as trading stock:
standing or growing crops;
crop-stools
trees planted and tended for sale
because they are severed from land.
BUT, section WILL APPLY to the severed item that you later start
holding as trading stock.
Livestock:
Refer pg. 8-16
BUT section does not apply if the item used to be trading stock or which
was trading stock of a business which is no longer carried on.
Sec 70-90(2) Any amount actually received for disposal is not included in assessable
income.
Sec 70-95 Implications for Acquiring entity:
85
Deemed to have bought the stock at the market value
Case R85
What is NOT ordinary course of business?
Consider:
nature of business being carried on
what are normal transactions in the course of that business; and
why this transaction is potentially outside the course of the business.
Sec 70-100(5) If election made, value is included in transferor’s income and the
transferee is treated as having bought the item for same value.
86
Sec 70-105(2) Person on whom the property devolves is deemed to have purchased it at
MV.
Sec 70-105(3) Legal representative of deceased may elect to have include in assessable
income the amount that would have been the value of the trading stock at
the end of an income year ending on the day of death.
Transitional Rules:
Refer pg 8-23 (for trading stock ceasing to be pre 1/7/97)
87
CAPITAL GAINS TAX
Separate Assets
Div. 108 Refer pg 5-4 for list of separate assets
TD 98/24 Where parties are dealing at arm’s length, Commissioner will accept the
allocation.
In absence of agreed allocation, each party needs to make his/her own
reasonable apportionment. Need to have regard to and be able to
justify, his/her reasonable apportionment based on relevant MV’s of
88
separate assets at time of making contract.
WDV of depreciable assets not necessarily their MV.
Collectable is:
Sec 108-10(2) a) artwork, jewellery, an antique, or a coin or medallion; or
b) a rare folio, manuscript or book;
c) postage stamp or first day cover
that is used or kept mainly for your personal use or enjoyment.
Sec 118-10(3) Capital gain from a PUA is disregarded IF you acquired the asset for
<$10,000 (exclude net ITC)
Sec 108-25 For cost base of a PUA, disregard the third element – non-capital costs of
ownership
Collectables:
Sec 108-10(1) Capital losses from collectables can be used only to reduce capital gains
from collectables.
Sec 108-10(4) Unused capital losses from collectables can be applied in following year
against capital gains from collectables exceeding capital losses from
collectables.
Sec 108-17 For cost base of a collectable, disregard the third element – non-capital
costs of ownership.
89
Sec 118-10(1) Disregard capital gain or loss from collectable if you acquired for $500 or
less (excluding net ITC).
Assets of Non-Residents
Div. 136 Liable for CGT if there is disposal or deemed disposal of asset with the
necessary connection with Australia – refer p 5-12 for assets with
‘necessary connection’.
CGT Events:
Sec 104-5 Table of CGT events – refer p5-17
90
Timing of Acquisitions and Disposals:
Refer to pg 9-14 for acquisition rules
91
CGT Exemptions and Concessions
Subdiv. 118-A Exemptions
Gains or losses on disposal are exempt for:
Sec 118-5(a) A car, motor cycle or similar vehicle
Sec 118-5(b) Disposal of valour or brave conduct awards provided the disposer did not
pay any consideration in respect of its acquisition.
Sec 118-10(1) & (2) Capital gain/loss from a collectable or interest in a collectable disregarded
if acquired for $500 or less.
Sec 118-10(3) Capital gain from PUA disregarded if acquired for $10,000 or less (from
1/7/98 for assets acquired before or after)
Sec 118-13 Capital gain or loss made from CGT even happening re shares in a PDF is
disregarded.
Sec 118-15 Receipt of consideration in relation to the disposal of firearm under the
‘firearms surrender arrangements’
Sec 118-24 Capital gain/loss is disregarded if, at the time of the CGT event, the asset
is:
a) your plant; or
b) if you are a ptnr, plant of the ptsp; or
c) if you are absolutely entitled to the asset as against the trustee of a
trust (not regarding any legal disability), plant of the trustee.
Sec 118-25 Where asset disposed of was trading stock immediately before disposal.
Sec 118-30 Gain/loss from CGT event relating to interest in the copyright in a film is
disregarded if:
a) amount is included in assessable income under s26AG (about film
proceeds)
b) an amount would have been included apart from s23H (about
exempting film proceeds).
Sec 118-35 Where amount received for results of R&D activities or for having
incurred R&D expenditure.
Sec 118-37(1) Capital gain/loss made from CGT event is disregarded for:
compensation or damages received for any wrong or injury suffered in
occupation
compensation or damages for any wrong, injury or illness suffered
personally;
gambling, game or competition with prizes…etc
92
Sec 118-37(2) Capital gain as result of receiving an amount as reimbursement or
payment of your expenses under one of these schemes:
General Practice Rural Incentives Program
Sydney Aircraft Noise Insulation Project
M4/M5 Cashback Scheme.
Sec 118-40 Capital loss lessee makes from expiry, surrender, forfeiture or assignment
of a lease disregarded IF lessee did not use lease solely or mainly for
purpose of producing assessable income.
Sec 118-45 Gain/loss from sale, transfer or assignment of rights to mine in area in
Australia disregarded if you have exempt income for the whole year from
the sale, transfer or assignment.
Sec 118-55 Gain/loss from contract you entered into solely to reduce risk of financial
loss suffered from currency exchange rate fluctuations disregarded if
contract relates to:
liability you have to make payment under another contract;
a CGT asset that is a right you acquire before 20/9/85 to receive
money under another contract.
Sec 118-60 Where person dies after 30/6/94 and disposes of asset under the Cultural
Bequests programme
Division 50 No capital deemed to have accrued if income of taxpayer for the year of
income is exempt by virtue of a ‘relevant exempting provision’.
Main Residence Exemption
Sec 118-110 Capital gains/losses from a CGT event relating to a CGT asset that is a
dwelling or the taxpayer’s ownership interest in it must be
disregarded if certain conditions are satisfied.
93
Dwelling was used for income-producing purposes during all or part
of year
Taxpayer had incurred interest on money borrowed to acquire the
dwelling or an ownership interest in it, such interest would have been
deductible.
BUT for this to work, dwelling must become taxpayer’s main residence as
soon as practicable after dwelling was erected AND continues to be so for
at least 3 months.
Change of residence:
Sec 118-140 Where taxpayer owns two dwellings at time of changing homes both
dwellings are taken to be main residence for limited period:
Sec 118-140(2) Dwelling that was disposed of was the main residence of taxpayer for
continuous period of at least 3 months during 12 months before time
of disposal
Dwelling not used for income producing purposes during that 12
month period, other than during period in which it was taxpayer’s
main residence.
The period allowed for two main residences is maximum of 6 months.
Absences:
Sec 118-145(1) Taxpayer can elect dwelling to be his/her main residence even though
taxpayer has ceased to use it as such.
Where there is NO election, dwelling will be subjected to CGT on pro-
rated basis.
Sec 118-145(2) Election may be made irrespective of period of time for which taxpayer
ceases to use dwelling as main residence, EXCEPT where there is
income-producing use, there is a 6 year limitation.
94
BUT spouse cannot live separately on a permanent basis.
Sec 118-170(3) & (4) If separate dwellings are nominated, can do if taxpayer has a 50% interest
or less in the dwelling.
Sec 118-170(4) HOWEVER, if taxpayer or spouse has more than 50% interest in
nominated dwelling, will be deemed to have had the dwelling as a main
residence for half the period.
Sec 118-192 When main residence first used for income producing purposes:
so that full exemption does not apply, the taxpayer will be taken to have
acquired dwelling at that time for its MV.
Conditions:
If acquired PRE-CGT and the dwelling was main residence just before
death and was not then being used for producing income – taxpayer’s
ownership interest will end within two years of deceased’s death.
If acquired POST-CGT and the dwelling was, from time of death until
ownership interest ends, the main residence of:
Spouse of deceased immediately before death; or
An individual who had the right to occupy the dwelling
under the will; or
Beneficiary who brought about the CGT event
The exemption will apply.
95
Cost Base and Reduced Cost Base
Capital Gain = Capital proceeds – cost base of asset
Capital Loss = Reduced cost base – capital proceeds
Capital Proceeds
Sec 116-20(1) Capital proceeds is the amount of money and the MV of property received
or entitled to be received as a result of the disposal.
Sec 103-10 There is an entitlement to receive if the taxpayer is entitled to have the
money or property applied for the benefit, or in accordance with the
directions, of the taxpayer.
Sec 116-30 Capital proceeds DEEMED to be MV where, there is a CGT even AND:
No capital proceeds received;
Proceeds cannot be value; or
The disposer and recipient were not dealing at arm’s length.
Sec 116-45 An adjustment will be made where it turns out that some or all of the
capital proceeds is not received and not likely to be received.
Adjustment is NOT available if:
The deemed MV rules are attached; or
If the non-receipt of consideration is due to an act or omission by the
taxpayer or associate or if the taxpayer has not taken all reasonable
steps to secure payment
Sec 116-50 The capital proceeds are reduced by any part of those proceeds that are
repaid by the taxpayer and by any compensation paid by the taxpayer that
can reasonably be regarded as a repayment of part of the proceeds.
Sec 116-55 Capital proceeds are increased if entity acquiring the asset acquires it
subject to a liability by way of security over asset. The proceeds are
increased by amount of liability that the other entity assumes.
96
to more than one CGT event, the proceeds from each event are so much of
the payment as is reasonably attributable to each event.
Sec 116-45
Non-receipt rule:
Capital proceeds reduced if:
Taxpayer is not likely to receive some or all of the proceeds
It is not because of anything the taxpayer has done or omitted to do;
and
Taxpayer took all reasonable steps to get unpaid amount paid.
Proceeds are reduced by the unpaid amount. If unpaid amount later
received, it is included and the CGT consequences re-calculated.
Sec 116-50
Repaid rule
Capital proceeds reduced by:
Any part of them that the taxpayer repays or
Any compensation the taxpayer pays that can be regarded as
repayment.
Capital proceeds NOT reduced by any part of payment which is
deductible.
Sec 116-55
Assumption of liability rule:
Capital proceeds are increased if another entity acquires asset subject to a
liability by way of security over the asset.
Increased by amount of liability the entity assumes.
Cost Base
Elements of cost base:
Sec 110-25(1) 5 elements:
Sec 110-25(3) 2) Amount of incidental costs of acquisition or that relate to a CGT event
that happens in relation to the asset.
97
of ownership may be included if not otherwise deductible under
another provision:
Interest on money borrowed to acquire asset
Repairs and maintenance
Insurance premiums
For land – rates and land taxes;
Interest on money borrowed to refinance the money
borrowed to acquired the asset
Interest on money borrowed to finance capex incurred to
increase asset value.
DOES NOT include cost of obtaining loan per TD 93/1
[note: this element is NOT indexed, per s114-1 and DOES not apply to
Sec 110-25(5)
PUA or collectables – s108-17 and 108-30]
Sec 114-1 Expenditure included in each element (EXCEPT third element) may be
indexed.
98
Sec 114-10(1) Can only index expenditure in the cost base if you had acquired the asset
at least 12 months before time of CGT event.
Indexation factor:
Sec 960-275(2) Quarter in year of disposal (regardless of when consideration paid) /
[all other elements] quarter in year of expenditure arose (note: NOT when paid)
Sec 960-275(3)
[1st element only]
Sec 110-55(2) 2) Amount of incidental costs of acquisition or that relate to a CGT event
that happens in relation to the asset.
99
What does not form part of RCB?
Sec 110-55(4) Expenditure does not form part of RCB to the extent that the taxpayer
has deducted or can deduct it (provided the deduction has been
reversed by an amount being included in income)
Sec 110-55(6) Expenditure does not form part of RCB if taxpayer has received as
recoupment of it, except so far as it is included in assessable income.
Modifications to Cost Base
Split, changed or merged assets:
Sec 112-25 Where:
Two or more assets have merged;
An asset has been divided into two or more assets; or
Asset has been changed, in whole or in part, into an asset of a different
nature
Then if any value of these assets is attributable to the original asset, its
cost base will include cost base of original asset calculated as if there had
been a disposal of the original asset at time when event occurred. (ie.
calculate each element of CB and RCB of original asset at time of change;
apportion in a reasonable way each element to each new asset)
EXCEPTION:
Right to receive ordinary or statutory income from trust
Decoration awarded for valour or brave conduct
Contractural or other legal or equitable right
Rights to acquire shares, options to acquire shares; units or options to
acquire units
Share in a company (issued by the company and taxpayer did not pay
for it)
Unit in a unit trust (issued w/o paying for it)
Deceased Estate:
Sec 128-10 When a taxpayer dies, a capital gain or loss from a CGT even happening
to a CGT asset the taxpayer owned just before death is ignored.
Sec 114-10(6) The 12 month indexation rule applies to the legal representative or
beneficiary as if that entity had acquired the asset when the taxpayer
100
acquired it.
101
Calculation of Gains and Losses
Capital Proceeds – Cost Base of Asset = Capital Gain
Reduced Cost Base – Capital Proceeds = Capital Loss
Sec 118-20 Where an amount is assessable by virtue of the CGT provisions and also
under another provision of the ITAA, the amount of capital gain is
reduced by the amount assessable under the other provision.
Sec 102-5(2) If a net capital loss accrues, it is not deductible, rather it is carried forward
for purpose of calculating the net capital gain or loss in the next year (see
below)
.
Prior to 21 September 1999
Sec 102-5(1) 1) Add up capital gains and losses during year
2) Subtract capital losses from gains – if zero, then no gain
3) Reduce amount further by applying any unapplied net capital losses
from previous years – if zero, then no gain
4) Result is net capital gain.
Sec 102-15(1) Where two or more net capital losses, apply the losses in order in which
they were incurred
Sec 102-15(2) Net capital losses can only be applied to extent that it has not already been
applied in an earlier income year
102
Same people owned the company during both capital loss year and
capital gain year;
No person controlled company’s voting power at any time during the
gain year who did not also control it during the whole of loss year.
Or company has carried on same business and not commenced additional
business or new transactions.
Discount percentage:
Sec 115-100 a) 50% of gain made for individuals or a trust
b) 33.33% of gain made by complying superannuation entity or by life
insurance company from a CGT asset that is a virtual PST asset.
103
When capital gain is NOT a discount gain:
Sec 115-40 Capital gain NOT discount gain if resulted from a CGT even that occurred
under an agreement the taxpayer made within 12 months of acquiring the
asset.
Sec 115-25(3) When CGT events cannot give rise of discount capital gain – refer pg
5-76
D1, D2, D3, E9, F1, F2, F5, H2, J2, J3
The rules will apply where a trustee pays tax on behalf of a beneficiary or
there is no beneficiary presently entitled to the income.
104
Rollovers
Disposal or Creation of Assets in a Wholly Owned Company by Individual or Trustee
Sec 122-15 Roll-over relief applies when a trigger event occurs to a CGT asset of the
taxpayer. The trigger event is when the taxpayer disposes of an asset
to a company and are specified as:
Event A1 – disposal of CGT asset or all of assets of a business to the
company – s104-10
Event D1 – creating contractual or other rights in company – s104-35
Event D2 – granting an option to the company – s104-35
Event D3 – granting company right to income from mining – s104-35
Event F1 – granting lease to company, or renewing or extending it –
s104-35
Conditions:
Sec 122-25(1) Must own all shares in the company just after the time of the trigger
event
Sec 122-25(5) Ordinary income and statutory income of company must not be
exempt from tax because of Div. 50 for the income year of trigger
event.
Sec 122-25(6) For an individual – must satisfy one of the items in table of the section
(residency requirements).
Sec 122-20(3) The MV of shares received must substantially be the same as:
for a disposal case – MV of assets transferred less any liabilities the
company undertakes to discharge in respect of the assets.
In any other cases – MV of assets created in company.
Sec 122-20(4) Any contingent liability inherent in a transferred asset (eg. contingent tax
liability) is ignored in comparing MV’s of the assets disposed of and the
shares received.
105
(precluded assets are car, motorcycle, trading stock, etc).
Sec 122-37(2)
Where taxpayer disposes all assets of business – liability incurred for
purposes of business is NOT a liability in respect of a specific asset/s of
the business. It is taken to be liability re all assets of the business.
Sec 122-37(3)
If liability is in respect of 2 or more assets – apportion the liability.
Consequences of roll-over:
Refer to pg 5-84
Transfer of Assets Between Group Companies in the Same Wholly Owned Group
Wholly owned group:
Sec 975-500 Company will be in the same wholly-owned group if:
One of the companies is a 100% subsidiary of the other company or
Each of the companies is a 100% subsidiary of the same third
company.
106
the trigger event would have resulted in the originating
company making a capital gain or making no capital loss and not
being entitled to a deduction; or
originating company acquired the roll-over asset pre
20/9/85; AND
b) the originating company and recipient company both choose to obtain
it.
Consequences of roll-over:
For originating company in all cases:
Sec 126-60(1) Capital gain or loss from trigger event disregarded.
107
c) company ceases, at some time, when it still owns the roll-over asset, to
be a subsidiary in relation to the wholly-owned group of transferor or
first transferor if a series of roll-overs involved; and
d) the cessation is not a sub-group break up.
108
Small Business Concessions
General Conditions
Conditions for entitlement to concessions:
Sec 152-15 Net value of assets owned by business entity and related entities must
be $5m or less
Sec 152-35 CGT asset involved must be active asset (see below)
Sec 152-50 to 152-60 If asset is a share or an interest in a trust, there must be a controlling
individual (of company – right to exercise at least 50% of voting
power and right to receive at least 50% of dividend; trust –
beneficially entitled to at least 50% of income and capital of trust) just
before the CGT event and the business entity must be a CGT
concession stakeholder (ie. controlling individual of company or trust;
for company – spouse of controlling individual if spouse has legal or
equitable interests in shares; for trust – spouse of controlling
individual if spouse is beneficially entitled to income or capital of
trust) in the company or trust.
Sec 152-20(1) The net value of the CGT asset = Sum of MV’s of assets – sum of
liabilities of entity relating to the assets.
[NOTE: ensure that liabilities taken into account relate to the specific
assets included].
109
Sec 152-20(3) Net value of CGT asset of small business CGT affiliate – disregard assets
of affiliate not used, or held ready for use in carrying on a business that
the entity carries on.
110
foreign exchange gains, UNLESS:
Asset is an intangible asset and has been substantially
developed, altered, or improved by you so that its MV has been
substantially enhanced; or
Main use for deriving rent only temporary.
Sec 152-210(1) The capital gain reduced by 50% may also qualify for the small business
retirement exemption and/or a small business rollover.
Sec 152-210(2) If they qualify, you can the order in which to apply them.
111
Company or trust conditions (s152-325) satisfied.
112
Small Business Asset Rollovers
Sec 152-410 Can choose to obtain a roll-over for a gain if:
General conditions satisfied
Within period starting one year before and ending 2 years after the last
CGT event during the year for which you choose the roll-over, you
choose on or more CGT assets as replacements
Replacement asset satisfies conditions in s152-420.
113
Transitional Provisions
Change in Majority Underlying Interest
Sec 149-30(1) Deemed acquisition:
Asset acquired pre-CGT stops being pre-CGT at earliest time when
majority underlying interest in asset not had by ultimate owners who had
MUI in asset before 20/9/85
Sec 149-30(2) Where asset stops being pre-CGT 1st element of CB is asset’s MV at that
time.
Sec 149-15(2) Underlying interest in a CGT asset is a beneficial interest that an ultimate
owner has (directly or indirectly) in asset or any ordinary income derived
from asset.
114
PARTNERSHIPS
Definition of Partnership
Sec 995-1(1) or s6(1) Partnership is an association of persons carrying on business as partners or
in receipt of ordinary income or statutory income jointly, but does not
include a company.
Taxing Partners:
Resident Partners:
Sec 92(1)(a) include in assessable income their individual interests in net income of
ptsp
Sec 92(2)(a) claim deduction for individual interests in ptsp loss
Sec 92(3)(a) include in exempt income their individual interests in exempt income
of ptsp.
Non-Resident Partners:
Sec 92(1)(b) include in assessable income their individual interests in net income of
ptsp that is sourced in Australia
Sec 92(2)(b) claim deduction for individual interests in ptsp loss sourced in
Australia
Sec 92(3)(b)
include in exempt income their individual interests in exempt income
of ptsp sourced in Australia.
115
Calculating Partnership Net Income or Loss
WIP Payments
Stapleton v. FCT; FCT v. Payment received by a retired partner on account of WIP unbilled at time
Grant & Ors of retirement is assessable income in hands of retired partner.
Dividends
Sec 160AQT Franked dividends received by ptsp included in assessable income and is
grossed up to include the company tax attributable to the dividend.
Sec 160AQT(1) Gross up amount = Class C franked amount x 36/64 (for 30/6/00)
Gross up amount = Class C franked amount x 34/66 (for 30/6/01)
Sec 160AQZ Imputation credit provided where assessable income includes the ‘grossed
up’ amount. Rebate is available to each partner’s share of the
imputation credit.
Partners’ Salaries
Ellis v. Joseph Ellis & Co Partner cannot be employee of a partnership so a partner salaries cannot
be a deduction from ptsp income.
IT 2218 Any partner salaries paid are treated as entitlement to allocation of profits
prior to general division among partners.
Interest Payments
Interest on external borrowings to reduce capital deductible where
borrowing by ptsp is for permitting certain amounts of ptsp capital to
be returned to existing partners.
Roberts and Smith Interest on loan deductible to ptsp where loan used to replace working
capital used in business carried on by ptsp.
TR 95/25 PROVIDED the capital account reduced represents funds employed in the
ptsp business resulting from contributions or retention of earnings NOT
capital generated such as loan is used to replace partnership capital which
is represented by internally generated goodwill or unrealised revaluations
of assets.
TD 200/24 Interest incurred by partner on borrowings to pay personal income tax not
deductible.
116
Superannuation contributions
Partnership cannot claim deduction under s82AAC or s82AAT for
contribution to a superannuation fund in relation to a partner. BUT
the partner can claim deduction under s82AAT for personal super
contributions.
Sec 82AAT Partners total deduction must not exceed the lesser of:
first $5,000 contributed + 75% of excess of total amount contributed
over $5,000
partners aged-based limit for income year.
117
TRUSTEES AND BENEFICIARIES
Legal disability:
Use ordinary meaning – person unable to give trustee an immediate valid
discharge in respect of a distribution of trust income (eg. minor, lunatics,
felons, undischarged bankrupt).
Trust Income
What is Taxed?
Sec 95(1) Net income = assessable income – allowable deductions
[calculated as though trustee is resident]
Dividends
Sec 160AQT Franked dividends received by trust included in assessable income and is
grossed up to include the company tax attributable to the dividend.
Sec 160AQT(1) Gross up amount = Class C franked amount x 36/64 (for 30/6/00)
Gross up amount = Class C franked amount x 34/66 (for 30/6/01)
Sec 160AQZ Imputation credit provided where assessable income includes the ‘grossed
up’ amount. Rebate is available to each beneficiary/trustee’s share of the
imputation credit.
118
so much of that share of net income of trust estate as is attributable to
a period when the B was not a resident and is also attributable to
sources in Australia.
Sec 95(2) If no presently entitled B’s, residency test applied to trust estate. Trust is
a resident if:
a trustee is a resident during any time during the year
the central management and control of the trust estate was in Australia
at any time during year of income.
Trust Losses
Sec 265-5 Change in ownership or control OR abnormal trading in trust units:
If there is a change in ownership or control OR an abnormal trading in
trust units, it:
may be prevented from deducting its tax losses of earlier income
years; and
may have to work out in a special way its net income and tax loss for
the income year; and
may be prevented from deducting certain amounts in respect of debts
incurred in income year or earlier income years.
UNLESS trust is an excepted trust (refer pg 12-9).
119
Sec 269-55(2)
For a widely held unit trust, the 50% stake test will be satisfied where it is
reasonable to assume that the requirements of the test are met.
Test period:
Is the beginning of the loss year, end of loss year and the time of
abnormal trading or change in ownership or control.
Subdiv. 269-D Pattern of Distribution test SATISFIED if, within 2 months of end of
income year:
trust has distributed, directly or indirectly, more than 50% of every
‘test year distribution’ of income to the same individuals for their own
benefit; and
trust has distributed, directly or indirectly, more than 50% of every
‘test year distribution’ of capital to the same individuals for their own
benefit (need not be same individuals as above).
Sec 267-35 The trust MUST NOT have been prevented from deducting the relevant
deductions in an earlier income year because of a failure to meet the
conditions in the patter of distribution test.
Sec 269-65(1)
120
Test year distribution is:
Is total of all distributions of income made by trust in any of the following
periods, PROVIDED the period does not start more than 6 years before
the start of the income year:
a) the period from the start of the income year until 2 months after its
end.
b) If trust distributed income before the trigger year (ie. loss year
mentioned in s267-20 per s269-65(2)) – the prior income year that is
closest to the trigger year.
c) [if (b) does not apply] If the trust distributed income in the trigger year
– the trigger year
d) [if (b) and (c) do not apply] – the income year, closest to trigger year,
in which the trust distributed income;
e) each intervening year between the one in (a) and the one in (b), (c) or
(d).
Sec 269-70
If the share of income distributed to each individual varies from year to
year, then only the smallest percentage distribution is taken into account
for the purpose of test year distributions.
Sec 269-80
EXCEPTION: if there is a loss of entitlement to future distributions due to
death or marriage breakdown, the income or capital received by this
individual is ignored in determining test year distributions.
121
Trust has a deduction (incl. prior year losses) in the income year;
There is a scheme under which:
Trust derives assessable income in income year;
Person not connected with the trust (outsider) provides a
benefit directly or indirectly to the trustee or B (or their
associates);
It is reasonable to conclude that any one or more of the
following is the case:
a) Scheme income has been derived wholly or partly, but not
merely incidentally because the deduction is allowable
b) Benefit has been provided to T or B wholly or partly, but
not merely incidentally because deduction is allowable
c) Benefit has been provided by T or B wholly or partly but
not merely incidentally because deduction is allowable.
Consequence:
If Net Income < Scheme assessable income, Net income increased to
equal scheme income. If deduction relates exclusively or may
appropriately be related to the scheme assessable income, it is not
allowable to the trust. ALSO, no deduction is allowable against the
scheme assessable income.
Sec 272-87(1) CANNOT make a family trust election unless it satisfies the family
control test at the end of the income year. That is:
a) individual specified in election (test individual) and one or more
members of his/her family (ie. spouse, child, grandparent, parent,
niece, nephew and spouse’s relatives, per s272-95); OR
b) any of persons above and a professional or legal adviser to the family
(does not apply if test individual and/or one or more members of the
family have more than a 50% stake in the income or capital of the
trust); OR
c) trustee of one or more family trusts, or such T and any persons above
(if controlling group has more than 50% stake in income or capital of
the trust).
122
capital of the trust.
Trustee is accustomed, is under an obligation or might reasonably be
expected to act, in accordance with the directions or wishes of the
group;
Group able to remove or appoint T or any of the T’s; or
Group gains fixed entitlements to more than 50% of the income or
capital of the trust.
123
Beneficiary Presently Entitled and No Legal Disability
Sec 97(1) Beneficiary shall be assessable on share of income:
That is attributable to a period when B was resident, whatever the
source; and
Share of net income that is attributable to Australian sources during
the period when B was not a resident.
Commissioner’s discretion:
Commissioner has a discretion to assess under s99 if he is of the opinion
that it is unreasonable to assess under s99A.
Sec 99 Net income, EXCEPT net income of an estate of a person who died <3yrs
before end of income year (in this case, income taxed at general individual
rates) is taxed at progressive rates:
If non-resident trust estate – use rates on pg 12-26 for ‘prescribed NR
beneficiaries’
If resident trust estate – use rates on pg 12-27.
124
Deceased Estates
Sec 101A Income received after death:
T is assessed on income received in a deceased’s estate if the deceased
would have been assessed on it.
125
COMPANIES
What is a Company?
Public Company
Sec 103A(2) A public company is one that:
Has its non-preference shares listed on a stock exchange on the last
day of the income year, and at:
No time in the year of income did 20 or fewer people share
75% or more of the company’s capital, voting or dividend rights
(s103A(3))
Nor were the voting or dividend rights capable of being
varied to produce such a result (sec 103A(6))
Was a cooperative company; or
Has at all times since date of incorporation been a non-profit company
and prohibited from making a distribution to its members or their
relatives; or
Is a mutual life assurance company; or
Is a friendly society dispensary; or
Is a subsidiary of a public company; or
Is a statutory body or a company in which a government body has a
controlling interest in as at the last day of the income year; or
Is a registered society, trade union or employer association; or
Is a limited partnership.
Sec 995-1
A private company is one which is not a public company.
126
Implications for Shareholders of Dividends
Refund of excess imputation credits:
Sec 567-25 Where you have credits left after offsetting your tax payable, you are
entitled to receive a refund
For INDIVIDUALS:
Sec 44(1) (inclusion in Y); Shareholder includes grossed up amount of dividend in assessable
s160AQT (for gross up) income.
Grossed up amount = Dividend x 64/36
Sec 160AQU A tax rebate generally equal to the amount of the imputation credit is
allowed to the shareholder.
127
assessable income. [Refer pg 13-28]
PR amount = Grossed up amount for dividend (ie. dividend x 36/64)
Sec 160AQW(1) Sec 160AQT amount shall be included in any relevant trust amounts in
same proportions as persons are liable to be assessed or would but for
s128D be assessed in respect of the franked dividend (ie. apportion
dividend and gross up amount between beneficiaries – beneficiaries also
claim their portion of the rebate).
Sec 160AQY Trustee who is liable to be assessed under s98 or 99 or 99A can claim the
relevant potential rebate amount in that assessment.
Sec 160AQV to s160ARD Where franked dividends are received indirectly through trusts, they are
treated as if they had been received directly.
Sec 160AQW(1) Sec 160AQT amount shall be included in any relevant partnership
amounts in same proportions as persons are liable to be assessed or would
but for s128D be assessed in respect of the franked dividend (ie. apportion
dividend and gross up amount between partners – partners also claim their
portion of the rebate).
Sec 160AQZ Franking rebates of partners will be equal to the potential rebate amount
in that partnership amount.
Sec 160AQV to s160ARD Where franked dividends are received indirectly through partnerships,
they are treated as if they had been received directly.
Franking Account
Franking account entries: Refer pg 12-70
Penalty Taxes
Franking Deficit Tax:
Sec 160AQJ FDT will arise where there is a debit balance in the franking account at
128
the end of the year, ie. franking deficit.
Sec 160ARU This tax is due and payable on the last day of the month following the end
of the relevant year.
Sec 160ASB; IT 2560 The commissioner has discretion to reduce amount of penalty.
Sec 160ARUA DDT due and payable 14 days after relevant refund is received.
129
calc. of DDT) exceeds 10% of the following:
Total class C franking credits in first year – (s160AQJC refund x 64/36)
Sec 160AQDB RFA is ascertained from the franking account balances at time of payment
of dividend.
130
Deemed Dividends
Distributions by a liquidator
Sec 47(1) Distributions to s/holders by a liquidator in the course of winding up the
company, to the extent to which they represent income derived by the
company other than income which has been properly applied to
replace a loss of PUC, shall be deemed to be dividends paid to
s/holders out of profits derived by it.
131
CGT Consequence:
The full buy-back is treated as consideration for the sale of the shares.
However, purchase price is reduced by the reduction amount.
132
FOREIGN INCOME, DEDUCTIONS AND CREDITS
Foreign Income
Sec 6AB Defines ‘foreign income’ – refer pg 16-4
Sec 160AF(8) When you are determining foreign losses and deductions against foreign
income, foreign income is also divided into 4 classes.
Sec 160AF(7) 4 classes of foreign source income for which FTC is available:
Sec 160AEA passive income (eg. dividends, interest, royalties, annuities, rents, etc)
Sec 160AE(4) offshore banking income
Sec 27CAA lump sum payments from eligible NR non-complying super funds
which are assessable
other income.
Sec 160AFD(8) There are 4 classes of foreign source income which are quarantined to
determine net foreign income:
interest income
modified passive income – ie. passive income w/o interest income
offshore banking income
other income.
133
Sec 79D Foreign deductions to offset foreign income:
Foreign deductions must be offset against assessable foreign income of a
particular class and cannot be offset against Australian sourced
income.
Foreign Losses
Sec 79D Foreign deductions to offset foreign income:
Foreign deductions must be offset against assessable foreign income of a
particular class and cannot be offset against Australian sourced
income.
Sec 160AFD Foreign losses may offset ONLY against assessable foreign income.
Sec 79D Foreign loss incurred in one year cannot be deducted from DOMESTIC
assessable income of same year, nor can it be carried forward and offset
against domestic assessable income of subsequent years.
134
Sec 160AF Foreign tax is calculated as:
any ‘direct’ credit for foreign tax paid on foreign income (eg. WHT);
plus
any indirect credit for underlying tax – eg. company that receives
foreign dividends from a related company taken to have paid company
tax on the dividends.
Excess FTC:
Sec 160AFE(1) Australian taxpayers can carry forward, for up to 5 years, any excess
FTC for application against tax payable on foreign income of the same
class.
Sec 160AFE(1D) Companies are entitled to transfer excess FTC to another company in the
same company group provided:
income company has, in the current year, derived income of the same
class to which the transferable excess credit relates;
income company is a group company (ie. 100% ownership) in relation
to the credit company in the current year; and
both companies agree in writing before lodgement of income
company’s ITR.
135
FRINGE BENEFITS TAX (All Sections in FBTAA)
FBT liability calculation
Sec 136AA Fringe benefits taxable amount = Aggregate fringe benefit amount x
1.9417 (ONLY from 1/4/96)
GST-creditable benefits:
Sec 149A A benefit is a GST creditable benefit if either of the following is, or was
entitled to an ITC because of the provision of the benefit:
Person who provided the benefit;
Person who is or was member of the same GST group as the person
who provided the benefit.
136
Type 1 aggregate fringe benefit amount is multiplied by factor of 2.1292
Rebatable Employers
Sec 65J(1) Refer to p 19-12 for list of rebatable employers (those who cannot claim
deduction for FBT paid, eg. religious institutions, non-profit org)
Exclusions:
Sec 136(1)(f) Salary and wages (per PAYE definition) are excluded from being fringe
benefits.
137
Is there a benefit?
Sec 136(1) Benefit is defined – refer pg 19-20
Is there a ‘car’?
Sec 136(1) Car is a MV, including a 4WD, that is:
A motor car, station wagon, panel van, utility truck or similar vehicle
designed to carry a load of less than 1 tonne; or
Any other road vehicle designed to carry a load of less than 1 tonne or
fewer than 9 passengers;
BUT does not include a motor cycle or similar.
MT 2027 Private use includes home to work travel BUT there are some exceptions
(eg. employment duties of itinerant nature, home is a place of work, etc)
138
Employee not performing duties of employment and has
custody or control of the car;
An associate of employee is entitled to use, or has custody
or control of, the car.
MT 2027
Prohibition by employer of use of the car which is not consistently
enforced will mean car is available for private use.
Loan Benefits
Sec 16(1) Where an employer makes a loan to the employee
139
Exemptions:
Sec 17(1)-17(2) Arm’s length loan made by employer in business of lending
Sec 17(3) Various advances to meet employment related expenses (conditions:
Sec 17(4) expenses will be incurred within 6 months of making loan, amount of
loan does not substantially exceed the level of expected expenses and
employee required to a/c to employer within 6 months of expenses
met and repay unused amount)
Advances repayable within 12 months if for temporary
accommodation where various conditions are met (eg. sole purpose of
loan is to enable employee to pay security deposit on
accommodation).
Exemptions:
Sec 20A Non-private use declaration
Sec 21 Accommodation expenses
Sec 22 Car expenses reimbursed on cents per kilometre basis.
140
Taxable value of expense payment benefit:
Refer pg 19-41
Housing Benefit
Sec 25 Where an employer grants an employee a housing right, for more than 1
day, as a usual place of residence.
Sec 136(1) Housing right is a lease or licence granted to a person to occupy or use a
unit of accommodation where it represents the person’s usual place of
residence.
Sec 58 Exemption:
Employees of government, religious institutions, or non-profit bodies who
provide live in care for the elderly, mentally or physically handicapped, or
those in necessitous circumstances.
Sec 58ZC Remote area housing benefits exempted from FBT from 1/4/00.
Expense payment:
Where the employee leases the car space and is then reimbursed by the
employer, the car space would not be associated premises of the employer
and an expense benefit will instead arise under s20.
BUT may be exempt under s58G
141
Exemptions:
Sec 58G(1) Residual benefits and certain expense payment benefits
Sec 58G(2) Benefits provided by certain non-profit bodies and public educational
institutions
Sec 58G(3) Benefits provided by govt. public educational institutions
Minor benefits
Benefits exempted by regulations, eg. disabled persons.
Sec 58GA(1) For small business employers, a car parking benefit provided in respect of
the employement is an exempt benefit if:
Car is not parked at commercial parking station; and
Employer of employee is not a public company or a subsidiary of a
public company, in relation to the day on which the benefit is
provided; and
The employer is not a government body; and
The sum of the employer’s ordinary income and statutory income for
the year of income ending most recently before start of the FBT year
is <$10m.
NOT EXEMPT if employee’s car is parked at a commercial parking
station.
Refer pg 19-53
Property Benefits
Sec 40 Arise where employer provides property of any type (eg. goods, real
property, shares and other securities or rights) to the employee.
(can be either in-house or external property benefits)
Exemption:
Sec 62 A general exemption of $500 of the taxable value of in-house property
benefits exists for each recipient employee for each year.
142
Residual Benefits
Sec 45 Arise on provision of benefits by employer to employee that meet the
criteria of fringe benefits but are not otherwise specified.
Exemptions:
Refer pg 19-62
Entertainment
Sec 37AD Meal entertainment benefit consists of:
a) entertainment by way of food and drink;
b) travel or accommodation connected with (a); or
c) reimbursement or payment of expenses incurred in providing (a) or
(b).
NOTE:
Sec 37AD It is still meal entertainment:
if business discussions or business transactions occur;
if in connection with the working of overtime or otherwise in
connection with the performance of the duties of any office or
employment;
for the purpose of promotion or advertising; or
at or in connection with a seminar.
TR 97/1 Tests for determining whether the provision of food and drink amounts to
meal entertainment are:
1. Why is the food and drink being provided?
2. What food and drink are being provided? If it is a function held at a
restaurant, it will be considered to be entertainment. As per IT 2675,
food and drink consumed off employer premises at a social function
constitutes meal entertainment.
3. When is it provided? The benefit was provided outside work hours, or
during work hours.
4. Where is it provided? At a restaurant off business premises, more
likely to be considered entertainment.
143
Other Benefits
Sec 32 Airport Transport Benefits – pg 19-66
Sec 35 Board Fringe Benefits – pg 19-66
144
145