(no subject)
Week 5 - Tutorial
Assessable Income
(Section 4-15 ITAA 1997)
Taxable Income
(Section 4-15 ITAA 1997)
Taxable Income
Equals
Assessable Income (Division 6)
minus
Deductions (Division 8)
2
SECTION 6-1 ITAA 1997
Diagram showing relationships among concepts in this Division
3
AASSSSEESSSSAABBLLEE IINNCCOOMMEE
• Ordinary Income (Section 6-5 ITAA 1997)
Income according to ordinary concepts.
• Statutory Income (Section 6-10 ITAA 1997)
Amounts which are not ordinary income but which are
included in Assessable Income by other provisions.
Refer to Checklist in section 10-5 ITAA 199
• If an amount is neither Ordinary Income or Statutory
Income then it is not Assessable Income
Subsection 6-15(1) ITAA 1997
• If an amount is Exempt Income it is not Assessable
Income.
Subsection 6-15(2) ITAA 1997
4
Assessable Income
Step 1
Is the amount (benefit) received Ordinary Income
Step 2
Is the amount (benefit) received Statutory Income
Step 3
Is the amount (benefit) received excluded from Assessable income
Exempt Income
Non assessable non exempt income
5
Ordinary Income
• Income according to ordinary concepts
• Income defined by the courts. Need to
consider Case Law.
Section 6-5(1) ITAA 1997
6
Characteristics of Ordinary
Income
• Sufficient nexus with
earning activity
• Convertibility
(money or money’s worth)
• Compensation principle
(same character)
• Exhibits periodicity,
recurrence and regularity
• Illegal, immoral or ultra
vires receipts included
• Capital gains are not
ordinary income
• There must be some
“gain” to the taxpayer
7
QUESTION 1
Are the receipts and/or benefits assessable income?
Ignore any Capital Gains Tax and Fringe Benefits
Tax implications.
8
•Is the benefit or amount ordinary income
•Is the benefit or amount statutory income
•Is the benefit or amount excluded:
• Exempt Income
• Non Assessable non Exempt Income
Part (i)
Salary - $200,000 per annum.
• Sec 6-5(1) ITAA ’97 defines “assessable income” to include income
according to ordinary concepts.
• Is salary, income according to ordinary concepts?
• Yes:
• Sufficient nexus with earning activity
• Convertibility issue - it is money (Cross v London & Provincial Trust
Ltd)
• Exhibits periodicity, recurrence and regularity (Dixon case)
• See also the definition of “Income from personal exertion” (Section
6(1) ITAA ‘36) [Lecture 3 - Slides 6 & 7]
• This would be treated as assessable income.
9
Part (ii)
Restrictive covenant - $20,000
• General rule - payments for restrictive covenants will be capital
receipts (Beak v Robson case & Higgs v Olivier case) [Lecture 3 -
Slide 13].
• Exceptions to general rule [Lecture 3 - Slide 14] indicate payments for
restrictive covenants will be included as income where:
- it is a normal incident of the particular employment or
- there is no significant restrictions on recipient or
- the restriction operates during the term of the employment (Riley v
Coglan).
• This would be treated as assessable income.
10
Part (iii)
Cash payment to spouse - $2,000
• Is the cash payment income according to ordinary
concepts?
• No: Not sufficient nexus with earning activity.
• Does not exhibit periodicity, recurrence and regularity
(Dixon case).
• Therefore it is not assessable income.
• Query: Why was the $2,000 paid to the spouse?
Who is the spouse?
11
Part (iv)
Entertainment allowance - $20,000
12
SECTION 15-2 Allowances and other things provided in respect of employment or
services
15-2(1) Your assessable income includes the value to you of all allowances, gratuities,
compensation, benefits, bonuses and premiums *provided to you in respect of, or for or
in relation directly or indirectly to, any employment of or services rendered by you
(including any service as a member of the Defence Force).
15-2(2) This is so whether the things were *provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income
under this section:
• (a) a *superannuation lump sum or an *employment termination payment;
(b) an *unused annual leave payment or an *unused long service leave payment;
• (c) a *dividend or *non-share dividend;
• (d) an amount that is assessable as *ordinary income under section 6-5;
• (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share
schemes) applies.
• Note:
• Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are
non-assessable non-exempt income.
13
Part (iv)
Entertainment allowance - $20,000
• Sec 15-2 ITAA 1997 - a taxpayer's assessable income
includes all allowances, gratuities, compensations,
benefits… which relate directly or indirectly to the
taxpayer's employment or to services rendered by the
taxpayer, but excludes “ordinary income”.
• It may also be income according to ordinary concepts. (See
the answer to Part (i) above).
• Either way it will be included in assessable income.
14
Part (v)
Subsidised canteen meals of employee
Section 6-5
Section 15-2
15
FCT v Cooke & Sherden (1980) 10 ATR 696
• 2 married couples carried on a business of selling
soft drinks from their lorry to the public. The
manufacturer set up a scheme of a free holiday
once they reached the sales quota.
• The rules stated that there was no cash payment in
lieu of the holiday.
• The taxpayers took a holiday under the scheme.
• The Commissioner claimed the value of this
“benefit” as part of their income.
• Held not ordinary income under s25(1)/s6-5 nor
statutory income under s26(e) / s15-2.
16
• Section 21A (ITAA 36) attempts to cover Non
Cash Business Benefits.
Subsection 21A(3) (ITAA 36) deals with the
Otherwise Deductible Rule
• Subsection 23L(2) ITAA 1936 treats the first $300
of Non-cash business benefits as Exempt Income
Legislation to deal with
Non Convertible Benefits
17
SECTION 15-2 Allowances and other things provided in respect of employment or
services
15-2(1) Your assessable income includes the value to you of all allowances, gratuities,
compensation, benefits, bonuses and premiums *provided to you in respect of, or
for or in relation directly or indirectly to, any employment of or services rendered
by you (including any service as a member of the Defence Force).
15-2(2) This is so whether the things were *provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income
under this section:
• (a) a *superannuation lump sum or an *employment termination payment;
(b) an *unused annual leave payment or an *unused long service leave payment;
• (c) a *dividend or *non-share dividend;
• (d) an amount that is assessable as *ordinary income under section 6-5;
• (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share
schemes) applies.
• Note:
• Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are
non-assessable non-exempt income.
18
Part (v)
Subsidised canteen meals of employee
Section 6-5 - General principle
• A benefit is not ordinary income unless it consists of money or
is capable of being converted into money (Cooke & Sherden
case).
• Can the subsidised canteen meals be converted to money? No
• The meals are non convertible to money therefore the benefit is
not ordinary income.
• Section 21A does not apply as the taxpayer is not carrying on a
business.
19
Part (v)
Subsidised canteen meals of employee
Section 15-2
• The section is applicable as convertibility is not an issue
FBT Interaction:
• Non-cash benefits provided to an employee by an
employer are generally subject to FBT which is a tax
imposed on the employer. A benefit which is subject to
FBT is neither assessable income nor exempt income of
the employee or other recipient (sec 23L ITAA36).
20
Part (vi)
Subsidised canteen meals of self-employed person
Section 6-5 Ordinary Income
Assume that the Client provided the benefit and therefore the
Nexus test satisfied
Is the Subsidised canteen meals convertible to money?
Assume No
• Section 21A ITAA ’36 applies to the receipt of non-cash business
benefits.
• The recipient is required to include in his/her assessable income
the arm’s length value of the benefit, less any unreimbursed
amount contributed by the recipient in acquiring the benefit.
• Section 15-2 Statutory Income
21
Part (vii)
Scholarship - $1,500 per annum
Section 6-5
• Is it ordinary income?
• Yes
- Not required to work for the provider of the Scholarship
(assumption)
- Regular amounts
- Supplements income (Dixon’s Case)
Following issues are necessary:
• Is it Exempt income
• Is it Non assessable non exempt income
22
Part (vii)
Scholarship - $1,500 per annum
• Sec 51-10, item 2.1A ITAA ‘97 provides a general
exemption for scholarships, bursaries or other educational
allowances derived by a student receiving full-time
education at a school, college or university.
• Sec 51-35 (c) exclusion - payments received by a student
"on the condition" that the student will (or will if required)
become, or continue to be, an employee of the payer or
enter into, or continue to be, a party to a contract for labour
with the payer are excluded from the exemption.
23
Part (vii)
Scholarship - $1,500 Lump Sum
• Section 6-5 - If it is NOT ordinary income
• The following issues are not necessary:
Is it Exempt income
Is it Non assessable non exempt income
24
Part (viii)
Isolated prize win
• Windfall gains resulting from winning a prize in a lottery
or in a competition are generally non-assessable.
• Is the prize is income according to ordinary concepts.
Factors to look at:
• NO sufficient nexus with earning activity, as the contestant
is not a regular contestant.
• No regularity - it is a one-off prize.
• It has the characteristics of a hobby or one off activity not
related to the contestant’s usual income deriving services.
25
Part (ix) (a)
Prizes won from 5 competitions
• However, where a taxpayer makes regular
appearances on radio or television programs, the
rewards for appearing, whether appearance fees or
prizes in cash or kind, may be assessable
(Taxation Ruling IT 167).
• In this case there is still a strong argument to be
made for it not being assessable income.
26
Part (ix) (b)
Prizes won from 100 competitions
• However, where a taxpayer makes regular appearances on radio or
television programs, the rewards for appearing, whether appearance
fees or prizes in cash or kind, may be assessable (Taxation Ruling IT
167).
Query:
• In this case the argument is not as strong as previously for it not to be assessable income.
• Therefore, prizes or awards won MAY be an incident of the taxpayer's
income-producing activities or business and will be assessable (e.g. an
author's literary competition prize, the ''Farmer of the Year'' award, and
prizes and awards made to a taxpayer carrying on a business of horse
racing).
27
Part (x)
Car received by a self-employed sportsman
• Payments and prizes received by sportspersons who earn income from services are assessable, unless received in the pursuit of a pastime or hobby (Stone case & Taxation Ruling TR 1999/17).
Is the car convertible to money?
• Under general principles, a benefit is not income within the ordinary meaning of that term unless it consists of money or is capable of being converted into money (Cooke & Sherden case).
• Sec 21A ITAA ’36 applies to the receipt of non-cash business benefits.
• The recipient is required to include in his/her assessable income
the arm’s length value of the benefit, less any unreimbursed amount contributed by the recipient in acquiring the benefit.
28
Part (xi)
Allowance to cover purchase & laundry of uniforms
Section 6-5
Section 15-2
29
SECTION 15-2 Allowances and other things provided in respect of employment or services
15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).
15-2(2) This is so whether the things were *provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income under this section:
• (a) a *superannuation lump sum or an *employment termination payment;
(b) an *unused annual leave payment or an *unused long service leave payment;
• (c) a *dividend or *non-share dividend;
• (d) an amount that is assessable as *ordinary income under section 6-5;
• (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share schemes) applies.
• Note:
• Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are non-assessable non-exempt income.
30
Part (xi)
Allowance to cover purchase & laundry of uniforms
• Sec 15-2 ITAA ‘97 - a taxpayer's assessable income includes all allowances, gratuities, compensations, benefits… which relate directly or indirectly to the taxpayer's employment or to services rendered by the
taxpayer, but excludes “ordinary income”.
• It may also be income according to ordinary concepts. (See Part (i) above).
• Either way it will be included in assessable income.
31
Question 2
• Advise White-acre Pty Ltd and the original shareholders in relation to the above facts.
• Ignore any Capital Gains Tax and Fringe Benefits Tax implications.
32
Sale of land by company
The following categories of transactions could be within the scope of the business [Lecture 3 - Slide 41]:
Transactions done in the course of carrying on a business.
Isolated transactions [Whitfords Beach case]
Extraordinary transactions [Myer Emporium Case]
33
Sale of land by company
• Need to consider whether the GAIN was the result of [Lecture 3 - Slide 42]:
the mere realisation of the asset »or
the carrying on of a business
34
Sale of land by company
• Consider the following cases [Lecture 3 - Slide 42]:
• Californian Copper Syndicate v Harris
• Scottish Aust Mining Co Ltd v FCT
• FCT v Whitfords Beach Pty Ltd
• Westfield Ltd v FCT
35
Sale of land by company
Factors the Court takes into account:
• System & Organisation - a hobby is not usually conducted in a systematic organised way but a business is.
• Scale of the activities - the scale of the taxpayer’s activities will
be considered
• Sustained, regular & frequent transactions - these are usual in a
business
• Profit motive - this primarily distinguishes business from a
hobby
• The nature of the taxpayer - activities carried out by a company
are more likely to be found to be business
36
Sale of land by company
In the Whitfords Beach case [Lecture 3 - Slide 43] the High Court held that the company’s activities (after the change in shareholders) amounted to more than the mere realisation of a capital asset and constituted the carrying on of an actual business of subdividing and selling land.
37
Sale of shares by original shareholders
• The original shareholders simply incorporated the company so that it could own and hold the land for the “private” purposes of the shareholders. Thirteen years later, the original shareholders sold their shares to the developer.
• The sales of the shares would be considered the mere realisation of a capital asset and therefore any proceeds would be considered to be capital receipts.
38
Question 3
• Advise Wilcox of the income taxation implications of the above.
• Ignore Capital Gains Tax, Section 15-15 of the Income Tax Assessment Act 1997 and Fringe Benefits Tax implications.
39
Sale of two quotas
• Need to consider whether the GAIN was the result of [Lecture 3 - Slide 42]:
the mere realisation of the asset
»or
the carrying on of a business
40
Sale of two quotas
Consider the following cases:
• Merv Brown
• Californian Copper Syndicate v Harris
• Scottish Aust Mining Co Ltd v FCT
• FCT v Whitfords Beach Pty Ltd
• Westfield Ltd v FCT
41
Sale of shares in subsidiary to an associate
• The gain was the result of the mere realisation of the assets and not the carrying on of a business.
• The factors that the Court takes into account (see above) are not present.
42
Share sale proceeds lent to another subsidiary
• Interest is the return for the use of one’s money. Sec 6(1) ITAA ’36
defines interest income to include interest, or a payment in the nature
of interest.
• Under sec 6-5 ITAA ‘97 interest is usually income regardless of source
or form of payment. [Lecture 3 - Slide 22].
• Refer to [Lecture 3 - Slide 24]:
Riches v Westminster Bank Ltd.
Lomax v Peter Dixon & Sons Ltd.
• The interest income stream would be assessable income.
43
Assignment of future interest income stream for $8 million lump sum
The following categories of transactions could be within the scope of the business [Lecture 3 - Slide 41]:
Transactions done in the course of carrying on a business.
Isolated transactions [Whitfords Beach case]
Extraordinary transactions [Myer Emporium Case]
44
Assignment of future interest income stream for $8 million lump sum
• Section 102CA - Statutory Income
• Compensation Principle
• Isolated business or commercial transaction will be ordinary income if
the taxpayer's purpose or intention in entering into the transaction was
to make a profit, notwithstanding that the transaction was not part of the
taxpayer's daily business activities (Myer case). [Lecture 3 - Slide 44].
• Profit making principle:
- Is their a profit motive? Unclear!!!
- For the Myer principle to apply, profit-making must be a significant
(but not necessarily the sole or dominant) purpose or intention
(Taxation Ruling TR 92/3).
• The $8 million lump sum proceeds will be treated as assessable income
under the compensation principle or section 102CA but unclear as to
whether the profit making principle applies.
STEP 3
Work out Net Capital Gain or Net Capital loss for the income year.
Net Capital Gain - Section 102-5
Steps in determining a Net Capital Gain for an income year
1. Reduce Capital Gain by any Capital Loss for the same year.
2. Reduce remaining Capital gain (if any) by any Capital Losses from previous years.
3. Reduce Capital Gains that qualify for a discount percentage (50%).
4. Apply any Small Business Concessions (not covered in this course).
5. Include Net Capital Gain in Assessable Income.
Net Capital Loss
In working out Net Capital Loss
1. Apply Capital Losses against Capital Gains that don’t attract the CGT discount or indexation.
2. Apply Capital Losses against Capital Gains that attract indexation.
3. Apply Capital Losses against Capital Gains that attract the CGT discount.
4. Carried forward Net Capital Loss indefinitely or until death.
Section 102-5
PERSONAL USE ASSETS
Special Rules
• In working out your Net Capital Gain or Net Capital Loss for the income
year.
• Disregard any Capital Loss you make from a Personal Use Asset
Subsection 108-20(1)
In working out Net Capital Gain or Net Capital Loss for the income year
• Offset Capital Losses from a Collectable ONLY against a Capital Gain from a Collectable
• Unused Collectable losses are carried forward to be offset against Capital Gains from Collectables Subsection 108-10 (4)
Collectables
Special Rules
Hints:
• Remember that you cannot offset Capital Losses against Assessable Income
Section 102-10(2).
• If you have Capital Losses they can ONLY
be offset against Capital Gains.
• If you do not have sufficient Capital Gains
arising in the year you made the Capital
Loss then the Capital Loss is carried
forward until there are Capital Gains.
Concessions
INDEXATION OR 50% DISCOUNT
Must hold the asset for at least 12 months to
be eligible for these concessions.
{subsection 115-25(1); subsection 114-10(1)}
Note:
Deceased Estates treated differently.
Concessions
a. Assets acquired before 20 September 1985 (pre CGT)
i. Generally exempt
b. Post CGT Assets sold prior to 11:45 am on 21 September 1999
i. Possibility of Indexation and Averaging (we will not cover)
c. Post CGT Assets acquired before and disposed of after
11:45 am on 21 September 1999
i. Possibility of Frozen Indexation or
ii. Possibility of Discount Method
d. Post CGT Assets purchased after 11:45 am on 21 September 1999
i. Possibility of Discount Method
Indexation - Section 114-1 - Example
• Peter purchases a building as an investment on 1 January 1994
for $250,000. This amount forms the first element of his cost base.
• He sold the building on 1 February 1996.
• The index number for the quarter in which he sold the building
(March quarter 1996) is 119.0. The index number for the
quarter in which he purchased the building (March quarter
1994) is 110.4.
• Applying section 960-275, work out the indexation factor
(rounded to three decimal points) as follows:
119.0
110.4 = (1.0778) 1.078
• The indexed first element of Peter's cost base is:
$250,000 × 1.078 = $269,500
Frozen Indexation - Example
• Peter purchases a building as an investment on 1 January 1994 for $250,000. This amount forms the first element of his cost base.
• He sold the building on 1 February 2010.
• The index number for the quarter in which he purchased (1.1.1994) the building (March quarter 1994) is 110.4.
• If asset sold after 21 September 1999 the numerator will always be 123.4 (September quarter 1999)
123.4
110.4 = (1.1177) 1.118
• The indexed first element of Peter's cost base is:
$250,000 × 1.118 = $279,500
Discount Method
(50% reduction of Capital Gain)
• Assets acquired and disposed of after 11:45 am on 21 Sept 1999
• Applies if asset held >= 12 months
• Can only use frozen indexation OR Discount Method (section 115-100)
• 50% Discount applicable only to individuals or trusts. Not to companies.
• One-third discount for complying superannuation funds.
Deceased Estates
Division 128
CGT is not meant to be a death duty but death can impact on its application.
Normally death will not create a CGT liability
Deceased Estates
Special Rules
1. Beneficiary's Acquisition Date (deceased date of death)
2. The Beneficiary’s Cost Base, Reduced Cost Base or Indexed Cost Base is
dependent on whether the asset is Pre or Post CGT in the hands of the deceased.
Deceased Estates
Special Rules
3. Two (2) Year Exemption Rule
• Limited to dwellings
• Dependent on whether the asset is Pre or Post CGT in the hands of the deceased.
• Interaction with Main Residence Exemption
• Whether property is income producing Goods and Services Tax (GST)
GST will be included in Capital Proceeds and Cost Bases where the
taxpayer is not within the GST system.
Keeping records for CGT purposes
Section 100-60
Why keep records?
• Ensure you do not disadvantage yourself.
• Comply as easily as possible.
• Plan for your CGT position in future income years.
• Legal requirement
Division 121.
Assessable Income
(Section 4-15 ITAA 1997)
Taxable Income
(Section 4-15 ITAA 1997)
Taxable Income
Equals
Assessable Income (Division 6)
minus
Deductions (Division 8)
2
SECTION 6-1 ITAA 1997
Diagram showing relationships among concepts in this Division
3
AASSSSEESSSSAABBLLEE IINNCCOOMMEE
• Ordinary Income (Section 6-5 ITAA 1997)
Income according to ordinary concepts.
• Statutory Income (Section 6-10 ITAA 1997)
Amounts which are not ordinary income but which are
included in Assessable Income by other provisions.
Refer to Checklist in section 10-5 ITAA 199
• If an amount is neither Ordinary Income or Statutory
Income then it is not Assessable Income
Subsection 6-15(1) ITAA 1997
• If an amount is Exempt Income it is not Assessable
Income.
Subsection 6-15(2) ITAA 1997
4
Assessable Income
Step 1
Is the amount (benefit) received Ordinary Income
Step 2
Is the amount (benefit) received Statutory Income
Step 3
Is the amount (benefit) received excluded from Assessable income
Exempt Income
Non assessable non exempt income
5
Ordinary Income
• Income according to ordinary concepts
• Income defined by the courts. Need to
consider Case Law.
Section 6-5(1) ITAA 1997
6
Characteristics of Ordinary
Income
• Sufficient nexus with
earning activity
• Convertibility
(money or money’s worth)
• Compensation principle
(same character)
• Exhibits periodicity,
recurrence and regularity
• Illegal, immoral or ultra
vires receipts included
• Capital gains are not
ordinary income
• There must be some
“gain” to the taxpayer
7
QUESTION 1
Are the receipts and/or benefits assessable income?
Ignore any Capital Gains Tax and Fringe Benefits
Tax implications.
8
•Is the benefit or amount ordinary income
•Is the benefit or amount statutory income
•Is the benefit or amount excluded:
• Exempt Income
• Non Assessable non Exempt Income
Part (i)
Salary - $200,000 per annum.
• Sec 6-5(1) ITAA ’97 defines “assessable income” to include income
according to ordinary concepts.
• Is salary, income according to ordinary concepts?
• Yes:
• Sufficient nexus with earning activity
• Convertibility issue - it is money (Cross v London & Provincial Trust
Ltd)
• Exhibits periodicity, recurrence and regularity (Dixon case)
• See also the definition of “Income from personal exertion” (Section
6(1) ITAA ‘36) [Lecture 3 - Slides 6 & 7]
• This would be treated as assessable income.
9
Part (ii)
Restrictive covenant - $20,000
• General rule - payments for restrictive covenants will be capital
receipts (Beak v Robson case & Higgs v Olivier case) [Lecture 3 -
Slide 13].
• Exceptions to general rule [Lecture 3 - Slide 14] indicate payments for
restrictive covenants will be included as income where:
- it is a normal incident of the particular employment or
- there is no significant restrictions on recipient or
- the restriction operates during the term of the employment (Riley v
Coglan).
• This would be treated as assessable income.
10
Part (iii)
Cash payment to spouse - $2,000
• Is the cash payment income according to ordinary
concepts?
• No: Not sufficient nexus with earning activity.
• Does not exhibit periodicity, recurrence and regularity
(Dixon case).
• Therefore it is not assessable income.
• Query: Why was the $2,000 paid to the spouse?
Who is the spouse?
11
Part (iv)
Entertainment allowance - $20,000
12
SECTION 15-2 Allowances and other things provided in respect of employment or
services
15-2(1) Your assessable income includes the value to you of all allowances, gratuities,
compensation, benefits, bonuses and premiums *provided to you in respect of, or for or
in relation directly or indirectly to, any employment of or services rendered by you
(including any service as a member of the Defence Force).
15-2(2) This is so whether the things were *provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income
under this section:
• (a) a *superannuation lump sum or an *employment termination payment;
(b) an *unused annual leave payment or an *unused long service leave payment;
• (c) a *dividend or *non-share dividend;
• (d) an amount that is assessable as *ordinary income under section 6-5;
• (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share
schemes) applies.
• Note:
• Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are
non-assessable non-exempt income.
13
Part (iv)
Entertainment allowance - $20,000
• Sec 15-2 ITAA 1997 - a taxpayer's assessable income
includes all allowances, gratuities, compensations,
benefits… which relate directly or indirectly to the
taxpayer's employment or to services rendered by the
taxpayer, but excludes “ordinary income”.
• It may also be income according to ordinary concepts. (See
the answer to Part (i) above).
• Either way it will be included in assessable income.
14
Part (v)
Subsidised canteen meals of employee
Section 6-5
Section 15-2
15
FCT v Cooke & Sherden (1980) 10 ATR 696
• 2 married couples carried on a business of selling
soft drinks from their lorry to the public. The
manufacturer set up a scheme of a free holiday
once they reached the sales quota.
• The rules stated that there was no cash payment in
lieu of the holiday.
• The taxpayers took a holiday under the scheme.
• The Commissioner claimed the value of this
“benefit” as part of their income.
• Held not ordinary income under s25(1)/s6-5 nor
statutory income under s26(e) / s15-2.
16
• Section 21A (ITAA 36) attempts to cover Non
Cash Business Benefits.
Subsection 21A(3) (ITAA 36) deals with the
Otherwise Deductible Rule
• Subsection 23L(2) ITAA 1936 treats the first $300
of Non-cash business benefits as Exempt Income
Legislation to deal with
Non Convertible Benefits
17
SECTION 15-2 Allowances and other things provided in respect of employment or
services
15-2(1) Your assessable income includes the value to you of all allowances, gratuities,
compensation, benefits, bonuses and premiums *provided to you in respect of, or
for or in relation directly or indirectly to, any employment of or services rendered
by you (including any service as a member of the Defence Force).
15-2(2) This is so whether the things were *provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income
under this section:
• (a) a *superannuation lump sum or an *employment termination payment;
(b) an *unused annual leave payment or an *unused long service leave payment;
• (c) a *dividend or *non-share dividend;
• (d) an amount that is assessable as *ordinary income under section 6-5;
• (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share
schemes) applies.
• Note:
• Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are
non-assessable non-exempt income.
18
Part (v)
Subsidised canteen meals of employee
Section 6-5 - General principle
• A benefit is not ordinary income unless it consists of money or
is capable of being converted into money (Cooke & Sherden
case).
• Can the subsidised canteen meals be converted to money? No
• The meals are non convertible to money therefore the benefit is
not ordinary income.
• Section 21A does not apply as the taxpayer is not carrying on a
business.
19
Part (v)
Subsidised canteen meals of employee
Section 15-2
• The section is applicable as convertibility is not an issue
FBT Interaction:
• Non-cash benefits provided to an employee by an
employer are generally subject to FBT which is a tax
imposed on the employer. A benefit which is subject to
FBT is neither assessable income nor exempt income of
the employee or other recipient (sec 23L ITAA36).
20
Part (vi)
Subsidised canteen meals of self-employed person
Section 6-5 Ordinary Income
Assume that the Client provided the benefit and therefore the
Nexus test satisfied
Is the Subsidised canteen meals convertible to money?
Assume No
• Section 21A ITAA ’36 applies to the receipt of non-cash business
benefits.
• The recipient is required to include in his/her assessable income
the arm’s length value of the benefit, less any unreimbursed
amount contributed by the recipient in acquiring the benefit.
• Section 15-2 Statutory Income
21
Part (vii)
Scholarship - $1,500 per annum
Section 6-5
• Is it ordinary income?
• Yes
- Not required to work for the provider of the Scholarship
(assumption)
- Regular amounts
- Supplements income (Dixon’s Case)
Following issues are necessary:
• Is it Exempt income
• Is it Non assessable non exempt income
22
Part (vii)
Scholarship - $1,500 per annum
• Sec 51-10, item 2.1A ITAA ‘97 provides a general
exemption for scholarships, bursaries or other educational
allowances derived by a student receiving full-time
education at a school, college or university.
• Sec 51-35 (c) exclusion - payments received by a student
"on the condition" that the student will (or will if required)
become, or continue to be, an employee of the payer or
enter into, or continue to be, a party to a contract for labour
with the payer are excluded from the exemption.
23
Part (vii)
Scholarship - $1,500 Lump Sum
• Section 6-5 - If it is NOT ordinary income
• The following issues are not necessary:
Is it Exempt income
Is it Non assessable non exempt income
24
Part (viii)
Isolated prize win
• Windfall gains resulting from winning a prize in a lottery
or in a competition are generally non-assessable.
• Is the prize is income according to ordinary concepts.
Factors to look at:
• NO sufficient nexus with earning activity, as the contestant
is not a regular contestant.
• No regularity - it is a one-off prize.
• It has the characteristics of a hobby or one off activity not
related to the contestant’s usual income deriving services.
25
Part (ix) (a)
Prizes won from 5 competitions
• However, where a taxpayer makes regular
appearances on radio or television programs, the
rewards for appearing, whether appearance fees or
prizes in cash or kind, may be assessable
(Taxation Ruling IT 167).
• In this case there is still a strong argument to be
made for it not being assessable income.
26
Part (ix) (b)
Prizes won from 100 competitions
• However, where a taxpayer makes regular appearances on radio or
television programs, the rewards for appearing, whether appearance
fees or prizes in cash or kind, may be assessable (Taxation Ruling IT
167).
Query:
• In this case the argument is not as strong as previously for it not to be assessable income.
• Therefore, prizes or awards won MAY be an incident of the taxpayer's
income-producing activities or business and will be assessable (e.g. an
author's literary competition prize, the ''Farmer of the Year'' award, and
prizes and awards made to a taxpayer carrying on a business of horse
racing).
27
Part (x)
Car received by a self-employed sportsman
• Payments and prizes received by sportspersons who earn income from services are assessable, unless received in the pursuit of a pastime or hobby (Stone case & Taxation Ruling TR 1999/17).
Is the car convertible to money?
• Under general principles, a benefit is not income within the ordinary meaning of that term unless it consists of money or is capable of being converted into money (Cooke & Sherden case).
• Sec 21A ITAA ’36 applies to the receipt of non-cash business benefits.
• The recipient is required to include in his/her assessable income
the arm’s length value of the benefit, less any unreimbursed amount contributed by the recipient in acquiring the benefit.
28
Part (xi)
Allowance to cover purchase & laundry of uniforms
Section 6-5
Section 15-2
29
SECTION 15-2 Allowances and other things provided in respect of employment or services
15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).
15-2(2) This is so whether the things were *provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income under this section:
• (a) a *superannuation lump sum or an *employment termination payment;
(b) an *unused annual leave payment or an *unused long service leave payment;
• (c) a *dividend or *non-share dividend;
• (d) an amount that is assessable as *ordinary income under section 6-5;
• (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share schemes) applies.
• Note:
• Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are non-assessable non-exempt income.
30
Part (xi)
Allowance to cover purchase & laundry of uniforms
• Sec 15-2 ITAA ‘97 - a taxpayer's assessable income includes all allowances, gratuities, compensations, benefits… which relate directly or indirectly to the taxpayer's employment or to services rendered by the
taxpayer, but excludes “ordinary income”.
• It may also be income according to ordinary concepts. (See Part (i) above).
• Either way it will be included in assessable income.
31
Question 2
• Advise White-acre Pty Ltd and the original shareholders in relation to the above facts.
• Ignore any Capital Gains Tax and Fringe Benefits Tax implications.
32
Sale of land by company
The following categories of transactions could be within the scope of the business [Lecture 3 - Slide 41]:
Transactions done in the course of carrying on a business.
Isolated transactions [Whitfords Beach case]
Extraordinary transactions [Myer Emporium Case]
33
Sale of land by company
• Need to consider whether the GAIN was the result of [Lecture 3 - Slide 42]:
the mere realisation of the asset »or
the carrying on of a business
34
Sale of land by company
• Consider the following cases [Lecture 3 - Slide 42]:
• Californian Copper Syndicate v Harris
• Scottish Aust Mining Co Ltd v FCT
• FCT v Whitfords Beach Pty Ltd
• Westfield Ltd v FCT
35
Sale of land by company
Factors the Court takes into account:
• System & Organisation - a hobby is not usually conducted in a systematic organised way but a business is.
• Scale of the activities - the scale of the taxpayer’s activities will
be considered
• Sustained, regular & frequent transactions - these are usual in a
business
• Profit motive - this primarily distinguishes business from a
hobby
• The nature of the taxpayer - activities carried out by a company
are more likely to be found to be business
36
Sale of land by company
In the Whitfords Beach case [Lecture 3 - Slide 43] the High Court held that the company’s activities (after the change in shareholders) amounted to more than the mere realisation of a capital asset and constituted the carrying on of an actual business of subdividing and selling land.
37
Sale of shares by original shareholders
• The original shareholders simply incorporated the company so that it could own and hold the land for the “private” purposes of the shareholders. Thirteen years later, the original shareholders sold their shares to the developer.
• The sales of the shares would be considered the mere realisation of a capital asset and therefore any proceeds would be considered to be capital receipts.
38
Question 3
• Advise Wilcox of the income taxation implications of the above.
• Ignore Capital Gains Tax, Section 15-15 of the Income Tax Assessment Act 1997 and Fringe Benefits Tax implications.
39
Sale of two quotas
• Need to consider whether the GAIN was the result of [Lecture 3 - Slide 42]:
the mere realisation of the asset
»or
the carrying on of a business
40
Sale of two quotas
Consider the following cases:
• Merv Brown
• Californian Copper Syndicate v Harris
• Scottish Aust Mining Co Ltd v FCT
• FCT v Whitfords Beach Pty Ltd
• Westfield Ltd v FCT
41
Sale of shares in subsidiary to an associate
• The gain was the result of the mere realisation of the assets and not the carrying on of a business.
• The factors that the Court takes into account (see above) are not present.
42
Share sale proceeds lent to another subsidiary
• Interest is the return for the use of one’s money. Sec 6(1) ITAA ’36
defines interest income to include interest, or a payment in the nature
of interest.
• Under sec 6-5 ITAA ‘97 interest is usually income regardless of source
or form of payment. [Lecture 3 - Slide 22].
• Refer to [Lecture 3 - Slide 24]:
Riches v Westminster Bank Ltd.
Lomax v Peter Dixon & Sons Ltd.
• The interest income stream would be assessable income.
43
Assignment of future interest income stream for $8 million lump sum
The following categories of transactions could be within the scope of the business [Lecture 3 - Slide 41]:
Transactions done in the course of carrying on a business.
Isolated transactions [Whitfords Beach case]
Extraordinary transactions [Myer Emporium Case]
44
Assignment of future interest income stream for $8 million lump sum
• Section 102CA - Statutory Income
• Compensation Principle
• Isolated business or commercial transaction will be ordinary income if
the taxpayer's purpose or intention in entering into the transaction was
to make a profit, notwithstanding that the transaction was not part of the
taxpayer's daily business activities (Myer case). [Lecture 3 - Slide 44].
• Profit making principle:
- Is their a profit motive? Unclear!!!
- For the Myer principle to apply, profit-making must be a significant
(but not necessarily the sole or dominant) purpose or intention
(Taxation Ruling TR 92/3).
• The $8 million lump sum proceeds will be treated as assessable income
under the compensation principle or section 102CA but unclear as to
whether the profit making principle applies.
STEP 3
Work out Net Capital Gain or Net Capital loss for the income year.
Net Capital Gain - Section 102-5
Steps in determining a Net Capital Gain for an income year
1. Reduce Capital Gain by any Capital Loss for the same year.
2. Reduce remaining Capital gain (if any) by any Capital Losses from previous years.
3. Reduce Capital Gains that qualify for a discount percentage (50%).
4. Apply any Small Business Concessions (not covered in this course).
5. Include Net Capital Gain in Assessable Income.
Net Capital Loss
In working out Net Capital Loss
1. Apply Capital Losses against Capital Gains that don’t attract the CGT discount or indexation.
2. Apply Capital Losses against Capital Gains that attract indexation.
3. Apply Capital Losses against Capital Gains that attract the CGT discount.
4. Carried forward Net Capital Loss indefinitely or until death.
Section 102-5
PERSONAL USE ASSETS
Special Rules
• In working out your Net Capital Gain or Net Capital Loss for the income
year.
• Disregard any Capital Loss you make from a Personal Use Asset
Subsection 108-20(1)
In working out Net Capital Gain or Net Capital Loss for the income year
• Offset Capital Losses from a Collectable ONLY against a Capital Gain from a Collectable
• Unused Collectable losses are carried forward to be offset against Capital Gains from Collectables Subsection 108-10 (4)
Collectables
Special Rules
Hints:
• Remember that you cannot offset Capital Losses against Assessable Income
Section 102-10(2).
• If you have Capital Losses they can ONLY
be offset against Capital Gains.
• If you do not have sufficient Capital Gains
arising in the year you made the Capital
Loss then the Capital Loss is carried
forward until there are Capital Gains.
Concessions
INDEXATION OR 50% DISCOUNT
Must hold the asset for at least 12 months to
be eligible for these concessions.
{subsection 115-25(1); subsection 114-10(1)}
Note:
Deceased Estates treated differently.
Concessions
a. Assets acquired before 20 September 1985 (pre CGT)
i. Generally exempt
b. Post CGT Assets sold prior to 11:45 am on 21 September 1999
i. Possibility of Indexation and Averaging (we will not cover)
c. Post CGT Assets acquired before and disposed of after
11:45 am on 21 September 1999
i. Possibility of Frozen Indexation or
ii. Possibility of Discount Method
d. Post CGT Assets purchased after 11:45 am on 21 September 1999
i. Possibility of Discount Method
Indexation - Section 114-1 - Example
• Peter purchases a building as an investment on 1 January 1994
for $250,000. This amount forms the first element of his cost base.
• He sold the building on 1 February 1996.
• The index number for the quarter in which he sold the building
(March quarter 1996) is 119.0. The index number for the
quarter in which he purchased the building (March quarter
1994) is 110.4.
• Applying section 960-275, work out the indexation factor
(rounded to three decimal points) as follows:
119.0
110.4 = (1.0778) 1.078
• The indexed first element of Peter's cost base is:
$250,000 × 1.078 = $269,500
Frozen Indexation - Example
• Peter purchases a building as an investment on 1 January 1994 for $250,000. This amount forms the first element of his cost base.
• He sold the building on 1 February 2010.
• The index number for the quarter in which he purchased (1.1.1994) the building (March quarter 1994) is 110.4.
• If asset sold after 21 September 1999 the numerator will always be 123.4 (September quarter 1999)
123.4
110.4 = (1.1177) 1.118
• The indexed first element of Peter's cost base is:
$250,000 × 1.118 = $279,500
Discount Method
(50% reduction of Capital Gain)
• Assets acquired and disposed of after 11:45 am on 21 Sept 1999
• Applies if asset held >= 12 months
• Can only use frozen indexation OR Discount Method (section 115-100)
• 50% Discount applicable only to individuals or trusts. Not to companies.
• One-third discount for complying superannuation funds.
Deceased Estates
Division 128
CGT is not meant to be a death duty but death can impact on its application.
Normally death will not create a CGT liability
Deceased Estates
Special Rules
1. Beneficiary's Acquisition Date (deceased date of death)
2. The Beneficiary’s Cost Base, Reduced Cost Base or Indexed Cost Base is
dependent on whether the asset is Pre or Post CGT in the hands of the deceased.
Deceased Estates
Special Rules
3. Two (2) Year Exemption Rule
• Limited to dwellings
• Dependent on whether the asset is Pre or Post CGT in the hands of the deceased.
• Interaction with Main Residence Exemption
• Whether property is income producing Goods and Services Tax (GST)
GST will be included in Capital Proceeds and Cost Bases where the
taxpayer is not within the GST system.
Keeping records for CGT purposes
Section 100-60
Why keep records?
• Ensure you do not disadvantage yourself.
• Comply as easily as possible.
• Plan for your CGT position in future income years.
• Legal requirement
Division 121.