TABL2751 - BUSINESS TAXATION

TUTORIAL 1: INTRODUCTION TO AUSTRALIAN TAXATION LAWTutorial problem allocation: 9th September with Sabrina

Answering tutorial question1. What is the issue?2. Identifying relevant facts3. Identify relevant statutory provisions and cases

a. Provisions: sections within the legislationb. Cases:

i. Similarities: rely on case ii. Differences: identify differences and distinguish

4. Application of the law to the factsa. Make a tentative conclusion

Analysing and answering a tax problemTwo documents have been placed on Moodle:

1. Learning skills in answering tax problems by reading tax cases 2. FCT v Anstis (2010) 241 CLR 443

Students should read this material before the first tutorial. The “learning skills” document contains an activity, which will be discussed.

General discussion questions (Overview of Australia’s taxation system)1. What are the primary sources of taxation law in Australia? 2. What is the status of ATO Rulings, Determinations, and Guidelines? 3. What is the formula for calculating taxable income? Which piece of legislation

and which section provides this formula?

FCT v Anstis (2010) 241 CLR 443 Background:

- Enrolled in a teaching degree, received youth allowance payments, in her tax return she said she received 14,000 from sales and 3,000 from youth allowance.

- Tax return in question was form 2005-2006.- Claimed allowable deductions for self-education expenses. Commissioner of

taxation disallowed deductions because they were not incurred in gaining or producing income.

- Federal court found in favour of the student, at Federal Court and High Court.

Outcome- At tribunal she was denied the deduction- Appealed the ruling: went to Federal Court

o Ruling was that it was an allowable deduction - Commissioner appealed to Full Federal Court

o Agreed that it was an allowable deduction- Commissioner appealed further to High Court

o Agreed that it was an allowable deduction- Commissioner changed the law because

Important cases1. Legislation

a. 2x Income Tax Legislationb. GST Actc. FBT Act

2. Caselaw a. FCC v Myer Emproiumb. FCT v Dixonc. FCT v Montgomery

3. Ruling - Can rely on a ruling; will never be denied a deduction. However this is not law therefore legislation and case law will over ride the rulings. If the need arises, they are guidelines only.

TUTORIAL TWO: WEEK 3 GOODS AND SERVICES TAX

QUESTION 1

Fast Food Pty Ltd operates a take away food outlet, with some tables on the premises.

You are given the following information on sales/purchases for the month of August show the following:

Calculate the GST payable / refundable by Fast Food Pty Ltd for the month of August (you can assume they account for GST on a cash basis). Assume that all substantiation requirements can be met.

(Remember that GST is based on the value of the taxable supply – you should not need to ask whether the amounts shown are GST inclusive or not).

GST-free (exemptions) versus input tax credits (obtain refunds from ATO if it’s a creditable acquisition for a creditable purpose) versus input tax supplies

Facts Take away food outlet - has tables on premises, can eat in or take-away

o 80,000 sale of hot foodo 10,000 sales of soft drinkso 20,000 purchases of ingredientso 6,000 purchase of soft drinks for resaleo 8,000 rent (input-taxed supplies, Subdivision 40-B)o 12,000 wages

o 1,500 containers and knives

Legal principles S7-1 (GST and input tax credits)

o GST is payable on taxable supplies and taxable importationso Entitlements to input tax credits arise on creditable acquisitions and

creditable importations S7-5 (Net amounts)

o Amount of GST and amounts of input tax credits are set off against each other to produce a net amount for a tax period

PART 1 Taxable supplies S9-5 (What are taxable supplies)1. Supply for consideration2. Made in the course or furtherance of an enterprise3. Connected with Australia4. Required to be registered

1. Sales of hot food 1. Supply is the sale of hot food, consideration: $80,0002. The operation of the fast food outlet is a business3. Assume that the takeaway food is in Australia, and that the supply of food is in

Australia. Assumed that it is registered because it’s turnover for one month exceeds $75,000.

Is the sales of hot food GST-free? S38-2 S38-3 (1) - A supply of food is not GST-free under section 38-2 if it is a supply of:

1. Food for consumption on the premises from which it is supplied; or 2. Hot food for consumption away from those premises; or

Therefore the supply of hot food is not GST-free.

2. Sales of soft drinks1. Supply is the sale of soft drinks, consideration: $10,0002. The operation of the fast food outlet is a business3. Assume that the takeaway food is in Australia, and that the supply of food is in

Australia. Assumed that it is registered.

Is the sales of soft drinks GST-free? (Schedule 2 - Beverages that are GST-free)Because it is not included in the schedule it is not GST-free.

PART 2 Input tax credits (Division 11)Can only obtain input tax credits on creditable supplies and creditable acquisitions

Legal reasoningS11-20, S11-5

1. Creditable purpose2. Supply is a taxable supply3. Consideration is provided

4. You are registered or required to be registered

1. Purchase of fresh ingredients ($20,000)1. Definitely for a creditable purpose as it is for the running of a business2. Are fresh ingredients a taxable supply?

a. Supply is for considerationb. For the fast food businessc. Connected to Australia and also registered

However, S38-2 states that fresh food is GST-free. Therefore there are no input tax credits to claim.

2. Purchase of soft drinksSoft drinks are a taxable supply - therefore can claim back input tax credits. (Based on previous reasoning)

3. RentRuling that says that rent for commercial premises is caught under taxable supply. Therefore can claim back input tax credits on commercial rent.

Residential rent is an input taxed supply however commercial rent is subject to GST (not subject to GST, and so no input tax credits).

4. WagesS9-20 (2) No GST charged on wages.

5. Containers, knives, forksContainers, knives, forks are a taxable supply. Therefore will have GST.

ConclusionGST on hot food = 80,000*11/10 * 10% = $72,727.27*10% = $7,272.73Sales of hot food = $909.1Total GST = 8,181.83

Soft drinks for resale = 545.45Rent (input tax) = 727.27Containers = 136.36Wages = 0Total input tax credits = $1,409.08

Net them off to calculate GST refundable / payable = $6,772.74

What would happen if Fast Food Pty Ltd had mistakenly forgotten to charge GST on some of their sales? Would there be any liability for GST?

Yes, still liable for GST.

General discussion questions

1. What input tax credits, if any, are available in respect of the following: (You can assume all parties, if required, are registered for GST).

(a)  A fax machine, costing $1,100, purchased by a partnership of accountants carrying on practice in a large country town

Creditable acquisition for a creditable purpose. Accountants are using it for their business. Input tax credit = 1100/11 = $100.

(b)  A mobile phone costing $770 purchased by a dentist for use by his daughter who has just started boarding school.

Not a creditable acquisition for a creditable purpose. Daughter uses phone so it’s not for business, it’s being used in a private or domestic capacity - there’s no enterprise.

(c)  A computer system costing $11,000 purchased by a bank to run the banks financials services for fee paying customers

Financial services is a financial supply (Subdivision 48). Therefore the computer system is an input taxed supply. Therefore unable to obtain input tax credit on computer system which is used running financial services.

2. What GST, if any, is payable in respect of the following? (You can assume all parties, if required, are registered for GST).

(a)  Purchase, for $5,000, of a photocopier for use in an accounting practice

Taxable good. Used for enterprise, assumed to be connected to Australia. (s9-5).

5,000/11 = $454.55

(b)  Private health insurance premiums of $2,000

Health insurance is exempt from GST because it’s a basic good. See (Sub-Div 38-B, s38-55(1), page 1,720).

(c)  Goods worth $77,000 sold to a manufacturer in Japan

Exports are GST-free (Subdivision 38-E). This is assuming that the exports have been shipped within 60 days of which the supplier receives any consideration of the supply.

(d)  Family day care payments of $22/day in respect of a three-year-old child. Both of the parents work.

Child care is GST free if it is a supply of child care by a registered carer. See (Sub-Div 38-D, 38-140 to 150, page 1,722).

TUTORIAL THREE: TAX CALCULATIONS / INCOME – KEY CONCEPTS

Key facts Sandra is an Australian resident taxpayer. Tax offset = 3,700 HELP debt = 7,490 She doesn’t have private health insurance Restaurant earnings

o Assessable income = 109,000o Deductions = 45,000

Cleaner earningso Assessable income = 22,000o Deductions = 3,200

S4-15: Taxable income = assessable income - deductionsS4-10: Work out your tax payable / liability

1. Working out taxable income

S4-15Total assessable income = 109,000 + 22,000 = 131,000Total deductions = 45,000 + 3,200 = 48,200Total taxable income = 131,000 - 48,200 = 82,800

S4-10Calculations Cumulative total

Tax on 80,000 Given by tax table: 17,547Tax on 2,800 (@ 37%) 2,800*0.37 = 1,036 18,583Subtract tax offset (3700) 14,883Medicare levy (@ 1.5%) 82,800*0.015 = 1,242 16,125Medicare levy surcharge 0 because less than 84,001 16,125HELP debt repayment (@ 7%) 82,800*0.07 = 5,796 21,921

Total liability owed to ATO 21,921

Key facts

FY ending 30 June 2013 From 1 July 2012 - 31 January 2013

o 3 * 5 * 18 = $270 / week from waiter jobo $200 bonuso $70 bottle of wine o Tips approx. $40 each shift

November 2012o $100 non-transferable gift voucher

February 2013o $65,400 annual salary inclusive of 9% compulsory superannuationo $2,000 sign-on bonus (time period is 1 week)

What is ordinary income?

There is no definition of ordinary income in the 1997 ITAA legislation; there is something in case law and 1936 ITAA.

S6-5 - Assessable income includes income according to ordinary concepts, which is called ordinary income.

S6(1) - Income from personal exertion includes earnings, salaries, wages,

commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances…

From 1 July 2012 - 31 January 2013o 3 * 5 * 18 = $270 / week from waiter jobo $200 bonuso $70 bottle of wine o Tips approx. $40 each shift

November 2012o $100 non-transferable gift voucher

February 2013o $65,400 annual salary inclusive of 9% compulsory superannuationo $2,000 sign-on bonus

Income Type of income ReasoningWages for waiter Ordinary income Yes$200 bonus Ordinary income L v Perry

Certain gift vouchers were held to be income

Easily convertible into cash Incidental to employment

$70 bottle of wine Not ordinary income Is the gift convertible into cash?Tennant v Smith

Accommodation couldn’t be converted into cash because taxpayer couldn’t sublet out the house. Therefore not convertible so not ordinary income.

Tips Ordinary income Squatting Investment Voluntary payments that are

related to employment / business will be income.

Tips of average amount and regularity.

Kelly v FCT Gratuities related to the earning

activities will be regarded as income.

Scott v FCT Gift made to solicitor by

longstanding client - unexpected, friendship, Scott adequately remunerated for services, several other gifts made.

Super Not ordinary income Tax is not paid on superannuation by the taxpayer. It’s taxed on the super fund.

Sign-on bonus $2,000

Most likely ordinary income

Laurence Olivier Paid a large amount of money to

not work. Also similar to Sun case

Difference between this case and the Laurence Olivier case is that Philip’s contracted period for the bonus is only 1 week, and he is still required to work.

Gift voucher from university

Not ordinary income Gift voucher is not ordinary income because it’s not transferable and not related to employment and not regular.

General discussion questions

1. What differences exist in terms of the taxation of individual residents and non- residents?

Taxation of residents: S6-5(2)All Australian residents are taxed on income sourced from worldwide.

Taxation of non-residents: S 6-5(3) Non-residents have a different tax schedule. Non-residents don’t have a tax-free threshold. Don’t receive deductions for their donations. No medicare levy. Assessable income includes the ordinary income you derived directly or

directly from all Australian sources during the income year and other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source .

Taxed on income that is sourced from Australia. Ordinary or statutory income derived from a foreign source is non-assessable non-exempt income - however this does not include employment income.

2. Frank is a non-resident for taxation purposes. You are given the following information for the year ended 30 June 2014:

Australian sourced income:o Income from an Australian job: $12,000o Interest from an Australian bank account: $100

Non-Australian sourced income:o Income from an overseas job: $26,000

(All figures are in Australian dollars).

Calculate Frank’s liability to the ATO for the income year ended 30 June 2014.

Australian sourced income is taxed: 12,000 + 100 = 12,100

Therefore liability = (12,100) * 32.5% = $3,923.5

3. Oz Co is an Australian resident company. For the year ended 30 June 2014, the company has assessable income of $200,000 and deductions of $40,000. They have a tax offset of $5,000. What is the company’s tax liability?

Company’s taxable income = 200,000 - 40,000 = 160,000Company’s tax liability = 160,000 * 0.3 - 5,000 = 43,000

TUTORIAL FOUR: WEEK 5

Problem 1

XYZ Engineering Pty Ltd (an Australian company) enters into manufacturing contracts with various companies. It receives $100,000 compensation in connection with the cancellation of a contract made in the course of the company’s business with Logo Pty Ltd. The contract would have taken up 15% of XYZ Engineering’s manufacturing capacity for the next two years, and provided it with revenue of $150,000 over that period.

Would the $100,000 received by XYZ Engineering be assessable under s6-5 (i.e. ordinary income)? You do not need to consider the statutory income provisions.

Key facts Compensation of 100,000 for cancellation of contract with Logo

o Contract would have taken up 15% of Engineering’s manufacturing capacity for the next 2 years. Potential revenue was estimated to be 150,000.

Manufacturing, Australian companyo Company enters into manufacturing contracts with various companies.

Logo is only one company. Key issue: Is the compensation assessable as ordinary income under s6-5?

Cases: Heavy Minerals - compensation for cancellation of business contract will be

substitute for income (if profit-making structure left intact). Myer Emporium - lump sum amount that replaces future income will itself be

income. California Copper Products - compensation for cancellation of business

contract was capital as it resulted in termination of taxpayer’s business.

DecisionThe contract only takes up 15% of company’s revenue. It’s a component, but not necessarily a major component of the company’s business. It doesn’t seem like the business needs to be adjusted to compensate for the loss of this contract. Therefore it is likely that the profit-making structure has been left intact. The contract did not result in the termination of taxpayer’s business. 100,000 is about 75% of 150,000 therefore seems likely that it is a replacement of income.

ConclusionMost likely that the compensation will be treated as income under s 6-5.

Problem 2

Simpsons Shopping Centres Pty Ltd (“SSC”) was incorporated in 1995. Its main activity has been the design, construction and management of shopping centres. SSC’s usual practice is to target in advance an area with potential for a shopping centre and to acquire land in the area. In respect of one possible development it purchased land in 2008. However, when it came time to develop that site, the area was in deep recession. SSC consequently sold the land on 1 June in the current income year, for a profit of $600,000.

Will the profit be considered ordinary income? (You do not need to consider the capital gains tax provisions).

Key facts Company aim: main activity is design, construction and management of

shopping centres (incorporated in 1995). In respect of one possible development, it purchased land in 2008 however did

not end of developing. Intention was development. SSC sold land for profit of $600,000.

Cases Myer Emporium - isolated transaction doctrine (you can look at a transaction

by itself to determine whether or not is income, even if it may not be the company’s main business activity).

Westfield (1991) - transaction was not assessable as ordinary income but was treated as capital.

DecisionInitially when they purchased the land, the intention was to develop the land (similar to Westfield). They only decided to sell because they could not profit from the development of the land. Therefore should be capital gains.

Problem 3Victoria holds patents for a new type of computer chip to be used in “robotic pets” and enters into an exclusive licensing agreement with a Japanese company for the manufacture and sale of such robotic pets in Japan. The licensing agreement provides for a payment of $5 for each robotic pet sold and for the payment by the Japanese company to Victoria of a lump sum of $50,000, described as a “non-refundable advance of royalties”. The Japanese company is entitled to credit royalty entitlements payable against this sum, but in fact no robotic pets are sold by the Japanese company, and the $50,000 is the only amount ever received by Victoria.

What amounts, if any, will be included in Victoria’s assessable income (under either the ordinary or statutory income provisions?) You are not required to consider the capital gains tax provisions.

Key facts Victoria holds patents for a new computer chips - for robotic pets Enters into a licensing agreement $5 for each robotic pet sold, and received a lump sum of $50,000

o “non-refundable advance of royalties”

Japanese company was entitled to credit royalty entitlements payable against this sum

No pets were ever sold so Victoria only received $50,000

Issue Is the 50,000 going to be royalty income? S6-5 and S15-20

Case Stanton v FCT - not a fixed payment for use of property means not royalties. McCauley v FCT - fixed payment for use of property means royalties/ AAT case 34 (1987)

Decision Lump sum received in advance would be regardless of whether or not she sold

the pets. You have a structure of royalties, but the royalty income is going to be 0 because no pets were sold. Not royalty income under ordinary or statutory income.

50,000 is from the patents (licensing agreements) therefore is not ordinary income and is likely to be captured under capital.

General discussion questions1. What two principles can be extracted from the decision in Myer

Emporium? 1. An extraordinary transaction will be assessable income if the taxpayer entered into the transaction with the intention or purpose of making a profit from the transaction (first strand of Myer)2. Lump-sum amount received as compensation for lost income will be treated as income (second strand of Myer)

2. Can a royalty that is taxable under s 6-5 be taxable under s 15-20?

No, it cannot be taxable under both sections. You cannot be taxed under two sections.

TUTORIAL FIVE: WEEK 6

Key facts Joe is an Australian resident Tax accountant for ZYX - works for Australian company Salary of $90,000 plus 9% Employer paid for employee’s $6000 education (Masters of Taxation) in

August 2013 Employer reimbursed employee $1200 for private health insurance and $900

for gym membership

1) Calculating accounting firm’s FBT liability

1. Is there a fringe benefit?Defined in s136 (1)

A benefit Provided during year of tax By an employer, associate or third party arranger In respect of the employment of the employee

1. Salary of $90,000 plus 9% - not FBT under s136 (1)2. Employer paid for employee’s $6000 education (Masters of Taxation) in

August 2013 - FB because its provided to Joe in respect of his employment3. Employer reimbursed employee $1200 for private health insurance and $900

for gym membership - FB because its provided to Joe in respect of his employment

It seems that the education, private health insurance and gym membership were paid in respect of the employment of the employee as there is no indication that it was from a personal relationship between the employee and the employer.

2. Is the benefit excluded?

No, none of the benefits are excluded. Minor fringe benefits exclusion clause does not operate as the value of the benefits need to be < $300.

3. Identify “category” of benefit

Expense payment fringe benefit (Div 5)

An expense payment fringe benefit may arise in either of two ways:A. where you (the employer) reimburse an employee for expenses they incurB. where you pay a third party in satisfaction of expenses incurred by an

employee.

1. Education: expense payment fringe benefit (Div 5) - S20A 2. Private health insurance: expense payment fringe benefit (Div 5) - S20B

3. Gym membership: expense payment fringe benefit (Div 5) - S20B

4. Determine taxable value

The taxable value of an expense payment fringe benefit is the amount you reimburse or pay.

1. EducationAccording to s23, taxable value - $6000.

However under s24, if the self-education expenses are work-related (as it's a Master of Taxation you can assume that it is related to work), the taxable value can be reduced by the “otherwise deductible” rule. Taxable value may be reduced by the amount the employee would have been entitled to claim as an income tax deduction if you had not reimbursed them.

Therefore taxable value = 0, assuming that the expenditure is 100% related to business.

2. Private health insurance According to s23, taxable amount is the amount paid - $1200.Cannot be deductible because it is not connected to Joe’s employment.

3. Gym membershipAccording to s23, taxable amount is the amount paid - $900.Cannot be deductible because it is not connected to Joe’s employment.

5. Calculate fringe benefits taxable amount (grossed up amount)

Are goods liable under GST scheme? Private health insurance is GST-free supply (type 2) - S5B(1C) Education is GST-free supply (type 2) - S5B(1C) Gym membership is a taxably supply (type 1) - S5B(1B)

TYPE 1 aggregate fringe benefits amount (GST)

Gross-up rate year ending 2014 is 2.06471. Gym membership Therefore fringe benefits amount = 2.0647*900 = 1,858

TYPE 2 aggregate fringe benefits amount (GST-free)

Gross up rate year ending 2014 is 1.86921. Private health insurance Fringe benefits amount = 1.8692*1200 = 2,2432. EducationFringe benefits amount = 0

6. Calculate FBT liability

Amount of FBT liability = [(Type 1 fringe benefits taxable amount) + (Type 2 fringe benefits taxable amount)] x current FBT rate

= (1,858 + 2,243) * 0.465= 1,907

Q2)FBT liability that is paid is the deduction for the employer because it is a company incurred expense in connect with employment under s 8-1. All these benefits can also be claimed as a deduction.

Q3)GST (consumption tax) is not borne by the company. Income tax and FBT is borne by the employer. Therefore payment of FBT will have effect on the company’s account.

a) As input tax credit is available; this is a type 1 FBT asset. (s23, FBTAA)6000*2.0647 = 12,388

b) As input tax credit is not available; this is a type 2 FBT asset. (s18, FBTAA)

4000*1.8692 = 7,477

(12,388 + 7,477) * 0.465 = 9,234.23

Calculating loan fringe benefits ex.

a) Leased a building, lease expired.Is there a CGT event? C2 event (s104-25); cancellation, surrender or similar endings of an intangible CGT asset.Is there a CGT asset? A lease is a legal equitable right that is not a property (s108-5). Are there capital proceeds? Don’t know. Not told.Cost base? Don’t know. Not told.Exemptions? Most likely no exemptions.

b) Forfeits a deposit paid under contract. CGT event? H1 - forfeiture of a deposit (special capital receipts?).CGT asset? Contractual right to the deposit money is an asset. Capital proceeds? No.Cost base? No.Exemptions? Maybe main residence exemption (s118 - 110). However s118-110 (2)(b) specifically excludes forfeited deposits.

c) Disposal of trading stock and depreciated plant to Robert. Is there a CGT event? A1 (s104-1) happens if you dispose of a CGT asset.CGT asset? Trading stock and depreciated plant is an asset.

Trading stock is part of ordinary income so it shouldn’t be caught again under anti-overlap provisions (s118-20).Balancing adjustment Div 40 - caught in the income tax arena (s118-24) therefore also disregard depreciated plant.

6 Steps for calculating CGT1. Is there a CGT event?

You can only make a capital gain or loss if CGT event occurs: s102-20.S104-5 gives a list of CGT events.

o A: Disposalso B: Use and enjoyment before title passeso C: End of CGT asseto D: Creation of CGT assetso E: Trustso F: Leaseso G: Shareso H: Special Capital Receiptso I: Residency endso J: Events relating to roll-overso K: Othero L: Consolidated groups

2. Is there a CGT asset?3. Are there capital proceeds?4. What is the cost base?5. Is there a capital gain or loss?6. Does an exemption apply?

TUTORIAL SIX: WEEK 7

Key facts: Income year is 2013-2014 (relevant rates) Australian resident individual Net capital loss form prior year was 5,000 Ignore indexation Net capital gain for this income year?

1. HouseDate purchased: 1 September 1990Purchase price: 200,000Sales price: 820,000Other facts:

Joint ownership of house with wife Purchase and sales price is total price of house Mr/Mrs Smith have lived in the house since date of purchase Other costs: advertising (2,000), stamp duty (10,000), agent commission

(20,000)

2. Vacant landDate purchased: 1 February 2008Purchase price: 30,000Sales price: 150,000Other facts:

Completely separate blog of land to the house Other costs: advertising (1,000), stamp duty (2,000), agent commission

(4,000)

3. Vintage carDate purchased: 1 March 2002Purchase price: 22,000Sales price: NilOther facts:

Mr. Smith gave a car to his son Market value at time of disposal was 9,000 Vintage car is a 1924 Bentley Before sale, Mr. Smith paid 300 to have car serviced and 200 in advertising

expenses

4. TelevisionDate purchased: 1 July 2009Purchase price: 1,500Sales price: 200

5. 5,000 shares in ABCDate purchased: 1 July 2013Purchase price: 7,500Sales price: 18,000Other facts:

Purchase brokerage fees 300 Sale brokerage fees 500

6. 2,000 shares in CABDate purchased: 1 July 2010Purchase price: 6,000Sales price: 8,000Other facts:

Purchase brokerage fees 200 Sale brokerage fees 400

Steps CGT events104-5

Lists out all capital events

CGT assets108-5(1) A CGT asset is:

(a) any kind of property; or(b) a legal or equitable right that is not property

3 special categories + standard CGT assets1. Collectables2. Personal use assets3. “Separate” CGT assets3. CGT assets that aren’t collectables or personal use assets

CGT proceeds• s116-20 general rules

(1) The capital proceeds from a CGT event are the total of:(a) The money you have received, or are entitled to receive, in

respect of the event happening; and(b) The market value of any other property you have received, or

are entitled to receive, in respect of the event happening

Modifications to CGT proceedss116-251. Market value substitution: s116-302. Apportionment: s116-403. Non-receipt rule: s 116-454. Repaid rule: s116-505. Assumption of liability: s 116-556. Misappropriation rule: s116-60

Cost base s110-25• Cost base consists of five elements: s110-25(1)

– 1st element – money paid/property given in respect of acquiring: s110-25(2)

– 2nd element – incidental costs: s110-25(3) (see s110-35)– 3rd element – costs of owning: s110-25(4)

• Only if asset was acquired after 20th August 1991– 4th element – expenditure to increase or preserve value of asset or that

relates to installing or moving it: s110-25(5)– 5th element – expenditure to establish, preserve or defend title: s110-

25(6)

2 nd and 3 rd element: incidental costs and ownership costs • Incidental costs: See s110-35.

– Some examples (not exhaustive list) are: Cost of agent, accountant, legal adviser, surveyor etc; Stamp duty; Advertising costs; Borrowing expenses; Cost of conveyancing

• Ownership costs: See s110-25(4) – Only if asset acquired after 20 August 1991– Examples: Interest; Repairs; Land tax

Exemptions s100-304 categories of exemptions:

1. Exempt assets; cars2. Exempt or loss denying transactions; compensation for personal injury or your

tenancy comes to an end3. Anti-overlap provisions; reduce your capital gain by the amount that is

otherwise assessable4. Small business relief

House Vacant land Vintage car (1924)

TV Shares in ABC

Shares in CAB

CGT event CGT Event A1s104-1: happens if you dispose of a CGT asset.

CGT Event A1s104-1: happens if you dispose of a CGT asset.

CGT Event A1s104-1: happens if you dispose of a CGT asset.

CGT Event A1s104-1: happens if you dispose of a CGT asset.

CGT Event A1s104-1: happens if you dispose of a CGT asset.

CGT Event A1s104-1: happens if you dispose of a CGT asset.

CGT asset “Standard” CGT asset

Assets that are not considered to be personal use assets include land, buildings and shares (on ATO website but can’t find in legislation)

“Standard” CGT asset

Assets that are not considered to be personal use assets include land, buildings and shares (on ATO website but can’t find in legislation)

Could be a collectable or a personal use asset.

Is the car an antique (collectable)? Under TD1999/40 an asset that exceeds 100 years of age is generally recognised as an antique. Car is 90 years old.

S108-2(2) Personal use assets - a CGT asset (except a collectable) that is used or kept mainly for your

S108-2(2) Personal use assets - a CGT asset (except a collectable) that is used or kept mainly for your personal use or enjoyment

“Standard” CGT asset

Assets that are not considered to be personal use assets include land, buildings and shares (on ATO website but can’t find in legislation)

“Standard” CGT asset

Assets that are not considered to be personal use assets include land, buildings and shares (on ATO website but can’t find in legislation)

personal use or enjoyment

CGT proceeds

s116-20 general rules

Sales: 820,000

Joint ownership - apportionment rule (s116-40):

Only 410,000 relates to Mr. Smith.

s116-20 general rules

Sales: 150,000

Sales: Nil

Market value substitution: s116-30If you receive no capital proceeds from a CGT event you are taken to have received the market value of the CGT asset that is subject to the event.

Market value: 9,000

s116-20 general rules

Sales: 200

s116-20 general rules

Sales: 18,000Sale brokerage fees: -500

Capital proceeds = 17,500

s116-20 general rules

Sales: 8,000Sale brokerage fees: -400

Capital proceeds = 7,600

CGT cost base

Purchase price: 200,000

Incidental costs s110-35Advertising: 2,000Stamp duty: 10,000Agent commission: 20,000

Cost base = 232,000

Apportionment rule (s112-30)

Therefore new cost base is 116,000.

Purchase price: 30,000

Incidental costs s110-35Advertising: 1,000Stamp duty: 2,000Agent commission: 4,000

Cost base = 37,000

Purchase price: 22,000

Ownership costCar service: 300Cost of ownership are disregarded s110-25(4) for personal use assets

Incidental costAdvertising costs: 200

Cost base = 22,200

Purchase price: 1,500

Purchase price: 7,500

Incidental costsPurchase brokerage fees: 300

Cost base = 7,800

Purchase price: 6,000

Incidental costsPurchase brokerage fees: 200

Cost base = 6,200

Capital gain or loss?

410,000 - 116,000 = 294,000

150,000 - 37,000 = 113,000

9,000 - 22,200 = -13,200

200-1,500 = -1,300

17,500 - 7,800 = 9,700

7,600 - 6,200 = 1,400

s102-5: CGT discount (50%)

1,400 / 2 = 700

Exemption?

YES

s118-110Main residence exemption - CGT asset that is a dwelling if you are an individual and the dwelling was your main residence throughout ownership period.

NO YES

s118-5A capital gain / loss made from a car is disregarded.

YES

s118-10(2)Personal use assets with a 1st element cost base of $10,000 or less are exempt.

NO NO

Car

Capital gains Land = 113,000 (discountable) Shares (ABC) = 9,700 (not discountable) Shares (CAB) = 1,400 (discountable)

Capital loss Prior year capital loss = -5000

Offset prior year loss with shares (ABC) therefore ABC net capital gain = 4,700Net land capital gains = 0.5*788,000 = 394,000Net shares (CAB) capital gains = 0.5*1,400 = 700

TUTORIAL SEVEN: WEEK 8 GENERAL DEDUCTIONS

S8-1(2): Negative limb Cannot deduct a loss or outgoing to the extent that it is:

Expenditure of a capital nature Loss or outgoing that is private or domestic nature Related to gaining or producing your exempt income A provision of the Act prevents you from deducting it

S8-10: No double deduction

Toxical Group of chemical engineers incorporated a company called Toxical Express purpose of carrying on a business of treating toxic chemicals Came across a new business opportunity of developing toxic chemical

processing plant

Deductions 4,000,000 purchase of land incurred in Dec 2012 200,000 clean-up expenses 250,000 in legal fees for defending the proceedings brought by environmental

group 40,000 to defend a criminal prosecution action against one of Toxical’s

directors who assaulted one of the environmental protestors at a rally on the site in Nov 2013

Advise Toxical on whether any of the above amounts will be deductible under ITAA97 s8-1.

Is 4,000,000 deductible?S8-1 - yes deductible.S8-1(2) - no, because it is likely to be capital.

1. 200,000 clean-up expenses for pre-existing pollution on the site

S8-1(1): The 200,000 needed to be spent to clean up the site. Without cleaning up the site, it could not be prepared for business use therefore this expense is necessarily incurred in producing assessable income.

Steele: Bought land for purposes of producing assessable income - she intended to produce assessable income by building a motel, even though she decided to do something else with the land. There was no other purpose in incurring the expense other then for producing assessable income.

Softwood Pulp and Paper: Company conducted feasibility studies on land before they purchased. Could not deduct because the assessment expenses were preliminary. Costs were incurred before the project happened - therefore held to be capital in nature.

o Can distinguish Toxical because the clean-up expenses were incurred as part of the project. They had already bought the land - was not a feasibility study, was for the preparation of land that would produce income.

S8-1(2): Dixon’s test from Sun Newspapero Distinguish between business structure (capital) or business process

(income)o Character of advantage - what are the benefits o Manner in which it is relied upon or enjoyed - duration of the

benefito Characteristics of payment - how frequently is the payment made

The payment is most likely to be capital because it is a lump sum payment that will procure a long-term benefit. It’s not part of the process, it’s affecting the structure of the business. Without the expense there is no way for the business to continue.

2. 250,000 in legal fees for defending the proceedings brought by environmental groupHerald And Weekly Times (1932) 48 CLR 113Newspaper publisher - had to defend themselves against a libel case. Judge said that it was an unavoidable aspect of their job.

It is highly foreseeable that a chemical processing company will clash heads with environmental activists because of the nature of their business. It was necessary expenditure for them to continue their development.

S8-1(2): Look at the negative limbsIs it capital?

Dixon’s test: YES IT IS CAPITAL: Legal fees are about whether or not the planning

permits are valid. Legal fees are a pretty substantial. An ordinary part of the chemical cleaning business is seeking planning permits. It is also very likely that environmental activists would come after them.

NO IT IS NOT CAPITAL: expenditure relates to planning permits, which are crucial to the running of the business.

3. 40,000 to defend a criminal prosecution action against one of Toxical’s directors who assaulted one of the environmental protestors at a rally on the site in Nov 2013.

Without him, there is no business and by default he is the business structure.

If he’s not integral to the business - is the 40,000 relevant to the business? His actions are not there to aid the production of assessable income. Therefore it is not deductible because it does not fit into s8-1 (1).

Travel expenses and home-office expenses

Ruling / determination - determination is more specific to a particular area, and is of a lower hierarchy than ruling.

Home-office expensesRunning expenses vs staying at the place

Does the practise have the character of the place of business1. Identifiable2.

Not portable, can be set aside - clearly identifiable (does it mean a sign or defined floor space).

Can only claim 20% of 41,600 - tax ruling TR 93/30 says that you can claim deductions based on floor area.

Travel costsTravel from home to office are not deductible. This expense is not incurred IN GAINING income. Travelling is just to help you to get to a place of work.

Payne: You cannot claim for travelling expenses between job 1 and job 2. After Payne’s case, s 25-100 was introduced. Commissioner put in a new section to say that travelling between job 1 to job 2 IS DEDUCTIBLE. S25-100(3) - travel between two places where one of the places is where you reside, cannot be claimed.

1. Travel expenses: 500 - not deductible because of Looney case. 160 in taxi fares - should be deductible because of s25-100 (3).

2. Restaurant uniform: uniform has to be unique and distinctive and specific to the job. The uniform has a logo (general deduction) and also s34-15 (specific deduction).

3. Suit: is not deductible because the suit can be worn wherever he wants - expense is more private in nature.

4. Textbooks: not deductible - self-education expenses were not incurred as part of his job. He was hired after education expenses.

TUTORIAL EIGHT: WEEK 9 SPECIFIC DEDUCTIONS

Brief overview of deductionsTaxable income: assessable income - allowable deductionsAllowable deductions: general and specific deductions

S 8-1: Positive limbs what can be deducted

1. Incurred in gaining or producing assessable income2. Necessarily incurred in terms of the business

Negative limbs what can’t be deducted1. Capital2. Private or domestic3. Producing exempt income4. Specific prohibitions

S8-10: No double deductions allowed

Background information Purchased a house for 600,000 on 1 Sep 2013 Investment property Expenses incurred in 2013-2014

o Loan of 500,000 for 20 years to purchase the houseo Interest paid on house 28,000o Borrowing expenses were 3,000o Roof of house was damaged and replaced at time of purchase: 18,000

o Windows were broken in Nov 2013 by some teenagers - cost of replacement of 300

o 1,800 for real estate property fees for rental property management

What can be deducted under s8-10, 25-10, 25-25, for year ending 30 June 2014?

S8-1: General deductionsS25-10: RepairsS25-25: Borrowing expenses

Under s6-5, rental income is assessable income. Therefore expenses relating to rental income may be deductible.

Type of expense

Amount Is it deductible? Deductible amount

Interest expense

28,000 S8-1 (1)- relates to the production of assessable income, in the form of rental income- interest from the loan is necessary to acquire the property- it is not capital in nature (Dixon’s test)1. Frequency of payment - ongoing2. Doesn’t change profit-making structure, just a part of the business expenses C of T v Munro (1926)

28,000

Borrowing expenses

3,000 S8-1 (1)- borrowing expenses are necessary in acquiring the loan, to produce assessable incomeMore specific section: s25-25- borrowing expenses are deductible

The deduction will be over 5 years because the length of the loan is over 5 years

5 years = 1825 days

1 Sep 14 to 30 June 2014 = 303 days

Therefore deductible amount = 3000/1825*303= 498

Roof replacement

18,000 What is initial repair (capital) versus normal repair?

Law Shipping Co - money spent can’t be more tha the actual asset itself. Considered an improvement because it adds functional capacity and initial repairs are not considered as maintenance.

W Thomas - initial repairs were not

0 not deductible because it is capital

considered as repair costs because they are capital in nature. Costs of putting something into good order, is part of the acquisition costs, and is capital in nature.

S8-1 (1) -> deductibleS8-2 (2) -> capital, therefore included as cost of acquisition (initial repair)

Window replacement

300 S8-1 (1) -> deductibleS8-1 (2) -> capital in natureS25-10 -> repair was done to part of the premise, which was be produce assessable income

Are the windows a separate asset of their own, or part of a larger structure?

Lindsay / TR 97/23: windows are part of an entirety, not of its ownBP case: nothing to indicate that the material used for replacing windows is better

300

Real estate fees

1800 S8-1 (1) -> loss or outgoingS8-1 (2) -> is it capital in nature? - NO: recurring payments, they’re just part of the process of producing rental income similar to running costs

1800

Give a summary in the assignment of the conclusion

Expenditure Section Deductible amount for 2013 FYInterest expenses S8-1 28,000Borrowing costs S25-25 498Roof replacement S43-10 374Windows S25-10 300Real estate fees S8-1 1800Total

Key facts Panda pays 20,000 to a potential competitor, in return for competitor not to

open within next 6 months (outlet in NSW competing with Panda’s business) 2000 incurred speeding and parking fines from delivery drivers 9500 for entertainment expenses

o 8000 in respect of providing food and drinks for members of the public attending an open exhibition

Are any of the amounts deductible?S8-1(1) Is it expenditure relating to gaining and producing assessable incomeS8-1(2) Is it capital in nature?

Legal principle Reasoning20,000 to potential competitor

Dixon’s criteria - Sun Newspaper1. Character of advantage2. Length of benefit3. Manner of payment

Broken Hill Theatre - only cinema in the suburb, there was a competitor that wanted to open another theatre. Broken Hill paid an amount to the other cinema not to open.

Done to seek an advantagePaid as a lump sumHowever length of benefit is only 6 months

Therefore doesn’t have lasting qualities like in Sun Newspaper

Penalties S8-1 - incurred in delivering productsUnder s8-1(2) (d) - if there is a specific deduction then deduction is not deductibleS26-5 - not deductible because imposed by the courts (specific deduction)

Entertainment fees (8000)

S8-1 (1) - deductibleS8-1 (2) (d) - will not be deductible if there is a specific

negative deduction limbDiv 32 - prevents deduction of entertainment expenses even if business discussions occur

S32-45 - if it relates to promotion and advertising then it is exempt from Div 32 THEREFORE DEDUCTIBLE

Entertainment expenses (1500)

S8-1 (1) - deductibleS8-1 (2) - specific provision in Div 32 means that 1500 is not deductible

Q1)S8-1 is it related to assessable income? No it is not - it’s just a donation.However under Div 30: allows a deduction for money or property (incl. trading stock) of $2 or more that are made to one of the bodies listed in s30-315 (also see ATO website): “Deductible gift recipient”

TR 2005/13 - $20 is deductible - gift means that you do not get anything in return.Div 30 allows a deduction.

$100 - not deductible because

Q2)S8-1, not deductible because the expense is not incurred IN producing assessable income - Payne’s caseIf you’re travelling between home and work not deductible

S25-100If you’re travelling between one work place and another place not deductible

TUTORIAL EIGHT: DEDUCTIONS – CAPITAL ALLOWANCES AND CAPITAL WORKS

Div 43: 2.5% (1992 onwards) or 4% (hotels, motels) - look at legislation as in most cases 2.5% is applicable, however in specific cases 4% will apply.

Div 40:

Fact Jack has a qualification in computer electronics Purchased a shop for 385k. Completion of construction of purchases from

previous owner Jill was done in June 2002. Aim is to operate a tv / dvd repair business

o Busy street, in Parramatta. Construction of premises was completed by previous owner in June 2012, cost

Jill 160k to construct premises Jack borrowed 300k from an Australian bank to finance purchase Interest prior to commencement of business was 2800 and 11,100 from 1

November 2012 to 30 June 2013. When Jack bought the shop, he needed to replace the flooring (cheapest quote

was $3,000 - in order to save on flooring costs he removed it himself and did it with his brother).

New floor was installed at $11,500 by local contractors - completed on 15th October 2012.

15th October - spent $15,000 on work benches (delivered on 31st October 2012) - also spends $1,000 to have work benches bolted to the floor. Work benches have an effective life of 15 years.

Business commenced on 1 November 2012.

385k for a shop Not deductible under general deductions because capital in nature s8-1(2). Just because it’s on a busy road in Parramatta - doesn’t matter that it’s a plant

(Woolen Mills). S40-45: Div 40 doesn’t apply to capital works if Div 43 applies. S43-20: Div 43 applies to buildings or structural improvement which began

after 21st August 1979 o S43-10: You can deduct an amount for capital works for an income

year - you can only deduct an amount if the capital works has: Construction expenditure area Pool of construction area Use your area

Construction expenditure relevant to your area (s43-115)

S43-160 - maintained ready for use.Building is deductible 3,320.54

Diminishing value

Floor - removal No deduction can be claimed FCT v Western Suburbs Cinema No deduction for notional repairs - if you don’t actually spend the money,

there is no claim on deduction.Floor - addition

$11,500 on 15th October for new floor Not deductible under general deductions because it’s capital in nature. S25-10 repairs

o It is an initial repair therefore it is capital in nature

TUTORIAL ELEVEN: TAXATION OF PARTNERSHIPS; TAX ACCOUNTIGN AND TRADING STOCK

What is a partnership? Tax law has an extended meaning partnerships that are in receipt of

ordinary income or statutory income jointly

FactsWHOLESALE BUSINESS

Fred and Wilma are a married couple Run a successful book wholesaling business as a partnership (started 8 years) Operate business though a large factor, employ 12 staff who do majority of the

work (work in sales and in the factory) 30 June 2014

o Sales: 2.6M (made on cash and credit) 0.4M has not yet been received

o Additional 0.18M in 2014 relates to sales in 2013 tax yearo Wrote of debt of 20,000 relating to a sale made in 2013 - sales was

made to a coaching centre, which went bankrupt might be bad debt deduction

Details of trading stock COGS

Business paid 0.43M paid in salaries during the year, including 50k paid to Fred (Wilma has an unrelated job outside the partnership)

Other deductible expenses for business include 90k (assume deductible under s8-1)

Partnership agreement stipulates that after payment of Fred’s 50k, profits and losses are split 60% to Fred and 40% to Wilma

RENTAL PROPERTY Fred and Wilma own a rental property. Expenses and income include:

Wilma also earns 80k from employment unrelated to the business

Calculate Fred and Wilma’s income for the year ended 30 June 2014.

SALESMust consider whether it is cash or accrual basis for sales:

Cash income is calculated as how much cash you have received. Accrual income is calculated as when you have earned the come.

Carden’s case no one factor is going to be decisive

Cash Receipts a product of professional skills / personal work Few employees, level of profit attributable to employees low

Accruals Trading stock have trading stock Credit sales have credit sales (sales for the year is 2.6M, business is

relatively large) Capital equipment have a warehouse Employees important part of income earning process have 12 staff which

have worked for 8 years Can ‘match’ income and expenditure

Based on accruals method, total sales are 2.6M. 0.18M was considered in previous year so is not included in 2014 tax year.

BAD DEBTS25-35

1. Must be a debt debt is 20,0002. Debt must be bad unable to recover because the company has gone

bankrupt, must have shown evidence that you have tried to chase the debt3. Debt must have been written off during the year of income this has been

done by Fred and Wilma4. Debt must be formally included in assessable income sales made in

previous year, so would have been accounted in assessable income in the previous year (accruals basis)

Debt is going to be bad, therefore allowable deduction.

TRADING STOCK (2M)

Under s8-1, trading stock purchases are deductible (2M)

S70-35, para 2 if closing stock minus opening stock < 0, then this is assessable income. If closing stock minus opening stock > 0, then allowable deduction. Closing stock - opening stock = 600k - 400k = 200k assessable income.

S70-10 - definition of trading stock

SALARIES (0.38M to other employees + 0.05M to Fred who is a partner)Normally deductible under s8-1 (0.38M for other employees).

TR 2005/7 when a salary has been paid to a partner in a partnership, it is supposed to be treated as an entitlement to profit. Therefore 50K is not an allowable deduction.

OTHER DEDUCTIBLE EXPENSESThey are deductible under s8-1.

Sales 2.6MTS 0.2MTotal income 2.8M

Debt write-off 0.02MTS purchases 2MSalaries 0.38MOther deductible 0.09MTotal deductions 0.249MNet income 0.31M

50,000 must go to Fred

Remainder 260,000 will be general distribution according to 60:40 split.Fred 156K Wilma 104K

RENTAL PROPERTY Partnership agreement is not part of their business agreement Look at tax law definition of partnership (McDonald’s case)

(a) Under s 995-1 an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

Rental income = 28,600 ordinary income under s6-5Interest on mortgage = 14,000 allowable deduction under s8-1 (Steele)Rental agent fees = 2,800 allowable deduction under s8-1Council/water rates = 1,000 allowable deduction under s8-1 Minor repairs = 400 allowable deduction under specific repairs deduction (s25-10)

Net income = 10,400

Fred 5,200 taxable incomeWilma 5,200 taxable income

ConclusionFred

Net income from business = 160,000 + 50,000 Net income from rental property = 5,200Total =211,200

Wilma Net income from business = 104,000 Employment salary = 80,000Net income from rental property = 5,200Total = 189,200

General discussion questions

1. Why is it important to determine whether trading stock is ‘on hand’? What is the most significant factor in determining whether trading stock is ‘on hand’?

Adjustments under s70-35

s70-40: Value of trading stock on hand at beginning of year = value of trading stock at end of previous year

What does on hand mean? Farnsworth v C of T (1949) To determine whether trading stock is on hand, taxpayer must have dispositive power.

TR 2670 - dispositive power is defined in All States Frozen Foods P/L v C of T Taxpayer is a wholesaler that has frozen foods Has tax year-end of 30 June. On that day, at midnight, there was a huge

shipment that was in the middle of the water. The fact of physical possession is only one underlying factor. Property that is not physically held may still be on hand.

Am I able to sell the product, do I have the power to dispose of it?

2. ABC Electronics Pty Ltd is a retailer of various personal electronic goods. As part of their trading operations, they sell personal computers. Technological advances have left the company with a stock of outdated computers which have to be discounted below cost price or usual market prices to sell. Is there any relief available to the taxpayer in determining the value of closing stock for this range of computers?

s70-45(1) You must elect to value each item of trading stock on hand at the end of an income year at:

(a) its cost (b) its market selling value; or (c) its replacement value

s70-50 You may elect to value an item of your trading stock below all the values in section 70-45 if:

(a) that is warranted because of obsolescence or any other special

circumstances relating to that item and (b) the value you elect is reasonable. Each item can be valued using different method Can change method during income year

3. Assume that a husband and wife own a rental property (in equal shares). They sign a partnership agreement stating that any profits will be split 80/20. Is this valid for tax purposes? Why or why not?

No, based on McDonalds case.

TUTORIAL ELEVEN: TAXATION OF TRUSTS

Div 6, ITAA 1936 Act.

Trustee has a legal relationship with the Trustee holds trust property for the benefit for somebody else (beneficiary).

Key facts: Discretionary trust – able to change allocations of income Trustee – John

o Receives $20,000

o Income of $70,000 from other sources Beneficiaries

o Jane (wife) (R) – Income of 180,000 Receives $20,000

o Sophie (15) (R) – No income Receives $5,000

o Harry (19) (NR) – Income of $50,000 from none Australia sources Receives $10,000

o Henry (22) (R) – Income of $20,000 Receives $15,000

Income from trust estate = $80,000 Net income from the trust estate = $100,000

For each of the above distributions, advise whether the beneficiary or trustee will be liable for tax, the amount that will be taxed, and what tax rates will apply. Ensure you refer to the relevant legislative provisions.

Harry $50,000 is non Australian-sourced income.

Cases for present entitlement 1. Harmer v FCT (1991) 173 CLR 2642. FCT v Whiting (1943) 68 CLR 1993. FCT v Totledge Pty Ltd (1982) 12 ATR 830 4. Dwight v FCT (1992) 92 ATC 41925. Taylor v FCT (1970) 119 CLR 444

Key to present entitlement is whether the beneficiary has a present link to the money. In a discretionary trust, the trustee has the discretion to allocate the income. As John has allocated the money to Jane, Sophie, Harry and Henry

Bamford Proportionate method is the correct way for allocating taxes

Distribution % Tax base (additional assessable income)

Other income Tax rate

John 20/80 = 25% 100,000*25% = $25,000 $70,000 S97 – No legal disability, resident at end fo year, presently entitled.

32.5 – 37%Jane 20/80 = 25% 100,000*25% = $25,000 $180,000 S97 – No legal disability,

resident at end fo year, presently entitled.

45%Sophie 5/80 = 6.25% 100,000*6.25% = $6,250 $5,000 S98(1) – Trustee is liable

to pay tax if beneficiary is under legal disability.

Div 6AA – Anti-splitting provisions applicable to minors.

Between $0 and $417 – 0%.

Between $417 and $1,307 – 66%

Anything above $1,307 is taxed at 45%.

Harry 10/80 =12.5% 100,000*12.5% = $12,500 $10,000 ss98(2A)/(3) – Trustee is liable to pay tax on Harry’s share.

Non-resident, taxed at non-resident rate. This is 32.5%.

Henry 15/80 =18.75% 100,000*18.75% = $18,750 $15,000 S97 – No legal disability, resident at end fo year, presently entitled.

Undistributed 10 Trustee pays highest tax 45%.

Total 87.5% $100,000 (net trust income)

Tax minimisation planning Reduce the amounts distributed to Sophie to Harry and Henry. Distribute the undistributed amount.

General Discussion Questions

Compare the definition of ‘net income of the partnership’ in ITAA36 s90 with the definition of ‘net income of the trust estate’ in ITAA36 s95. What differences do you note between these definitions? Why do you think those differences exist?

Trust income is locked at the trust level. Losses in the trust are used to deduct trust income at the trust level.

Partnership losses can be used to offset against other assessable income.

What is the difference between the quantum and proportionate approach to allocating trust income?

Quantum approach – only taxed on the distributed amounts instead of the net income of the trust.

Australian resident company $1,500,000 profit

o $500,000 on sale of pre-CGT asset – non-assessable incomeo $1,600,000 ordinary income – assessable incomeo Deductions of $700,000 – 8-1 allowable deductionso Trading profit of $900,000o Dividend of $100,000 franked to 50% –

S44-1 talks about dividend income Gross-up dividend = amount of credits Ernie receives – s207-

20 30/70*50%*100 = 21,429 tax offset Bump dividend up by 21,429 Assessable dividend income = 121,429

Assessable income = 1,600,000 + 100,000 + 21,429Deductions = 700,000Taxable income = 1,021,429Tax liability = 1,021,429*30% (306,429) – 21,429 = 285,000

S6-5 Ordinary incomeS8-1 DeductionsS4-10 Taxable income * tax rate – offsetS4-15 Taxable income = assessable income – deductions

Tutorial problem

During the 2013 tax year, West Ltd provides you with the following information concerning its franking account:

1. 30.06.2012 – balance of franking account: $50,000

2. 28.07.2012 – payment of June 2011 PAYG instalment: $90,000

3. 30.09.2012 – received a distribution from an Australian resident public company of $280,000. The distribution had a franking percentage of 70%.

4. 28.10.2012 – payment of September 2011 PAYG instalment: $90,000

5. 15.11.2012 – tax refund of $40,000 relating to the 2010/11 tax year

6. 28.2.2013 – payment of December 2011 PAYG instalment: $90,000

7. 01.03.2013 – received an unfranked distribution from an Australian resident private company of $40,000

8. 28.04.2013 – payment of March 2012 PAYG instalment of $90,000. Required:

(1)  Prepare the company’s franking account for the year ended 30 June 2013.

Company’s franking account overviewS205-10: Each company has a franking account. S215 purpose of franking account is to keep track of tax paid by the company S205-15: Lists out credits and debits that can go into a franking account.

Franking account is separate from company’s financial condition – it doesn’t affect income statement or balance sheet. Allows payment of dividends which have tax credits attached to it.

When I pay tax - credit balance.When I receive tax refund - debit balance.

Generally you want a credit balance because you can provide franked dividends to the shareholders.

For year ending 30 June 2013. Tax year: 1/7/12-30/6/13Date Transaction Closing balance LegislationO/B 50,00028.7.12 Credit: 90,000 CR: 140,000 s205-15 (item 1)30.09.2012

Credit: 84,000

280,000 * (0.7) * (0.3/0.7) = 84,000

CR: 224,000 s205-15 (item 3)

Formula is from s202-60.28.10.2012

Credit: 90,000 CR: 314,00 s205-15 (item 1)

15.11.2012

Debit: 40,000 CR: 274,000 s205-30 (Item 2)

28.2.2013 Credit: 90,000 CR: 364,000 s205-15 (item 1)

01.03.2013

Unfranked distribution from an Australian resident private company of $40,000 - no tax credits attached to unfranked distribution.

28.04.2013

Credit: 90,000 CR: 454,000 s205-15 (item 1)

Do something with the franking balance - exam question.

(2)  Assume there are no further transactions that relate to the franking account between 29 April and 28 June, and that on 29 June 2013, West Ltd declares and pays a dividend of $1,400,000. West Ltd seeks your advice as to what percentage of the dividend should be franked. I.e: Would you advise they fully franked the dividend? Or should it only be partially franked? Ensure you fully explain your reasoning.

% dividend franking?

S202-60 – credit for distribution = 1.4M * 0.3/0.7 = 600,000

You need 600,000 in the franking account to pay a fully franked dividend of 1.4M.

Therefore if the company wants to pay a fully franked account they need their account to go into a deficit. However you will be penalised by the franking deficit tax.

S203-35 – 454,000/600,000 = 75.67% maximum franking percentage.

Or following calculations: 454,000/ (0.3/0.7) / 1,400,000 = 75.6%.

There franking distribution should be 75%.

0.75*0.3/0.7 * 1.4M = 450,000 franking credits required for a 75% franked dividend of 1.4M.

S205-30 (item 1) – Debit 450,000 C/B of 454,000 so that you would have a O/B of 4,000 following year.

Fully franked or partially franked + reasoning?

Should not be fully franked because you would have to pay tax. Recommend a 75% franked dividend of 1.4M so that a little balance of 4,000 would be left over. (454,000 - 450,000)

Question 1: s202-15: Maximum franking credit: 120,000 * 30/70 = 51,428Franking credit exceeds maximum franking credit not allowed. To the shareholders, the maximum amount that can be claimed by them is 51,428.Only 51,428 can be deducted - s205-15.

Question 2:S44-1 dividends are part of assessable income. 2,000 * 0.3/0.7 = 857.14

Therefore total assessable income = 2,857.14Taxable income = 2,857.14Tax payable = 0 because it is below the minimum tax threshold.

S207-22: you would get 857.14 back.

Question 3:S128B (1)S128B (4)

There is no double tax agreement in place.Therefore according to the tax table Pauline is required to pay 30% tax.

S128B (3) If the dividend is franked, the portion that the dividend is franked will be exempt from tax.

WHT - company holds back the tax and pays it to the tax office on your behalf. The portion that is franked is exempt from withholding tax. Portion that is unfranked needs to have tax paid on it.

$2,500 is franked tax has been paid.$2,500 is unfranked needs to be reduced by withholding tax. Witholding tax = $2,500 * 0.3 = $750.

Amount that Pauline physically gets is $5,000 - $750 = $4,250.

If the amount is fully franked, the you would not have to pay any withholding tax.