(s4-10(3)) INCOME TAX = (TAXABLE INCOME x TAX RATE) - OFFSETS (s 13-1) (s36-10) TAX LOSS = DEDUCTIONS - ASSESSABLE INCOME - NET EXEMPT INCOME

Transcription

1 UNIT 1 - OVERVIEW OF THE AUSTRALIAN TAXATION SYSTEM INCOME: (s4-10(3)) INCOME TAX = (TAXABLE INCOME x TAX RATE) - OFFSETS (s 13-1) (s4-15) TAXABLE INCOME = ASSESSABLE INCOM - DEDUDUCTIONS (s36-10) TAX LOSS = DEDUCTIONS - ASSESSABLE INCOME - NET EXEMPT INCOME ASSESSABLE INCOME = ORDINARY INCOME + STATUTORY INCOME (s10-5) Assessable Income EXCLUDES Non-Assessable Income, Non-Exempt Income & Exempt Income ORDNARY INCOME s6-5(1): Income according to Ordinary Concepts (s.6-5(1)) Arising from employment of services (Kelly v FCT); (Scott v FCT) Arising from business (FCT v Stone); (FCT v Myer Emporium) Is regular/periodic (Dixon v FCT) & (Harris v FCT) Not Capital Amount (Eisner v Macomber); (Australian Catholic Assurance Co. Limited v FCt; London Australia Investment Co Limited v FCT) Not personal gift (Scott v FCT); (Hayes v FCT) Isolated transaction (FCT v Myer Eporium) Must be in money, or convertible into money (Cooke & Sherden v FCT); s 21A ITAA 1936 Replace or substitute for loss of income (Liftronic Pty Ltd v FCT) Compensation for loss of trading stock (FCT v Wade) DERIVATION OF INCOME: CASH Income is derived when it is actually or constructively received (Brent v FCT) INTEREST Individual investor On receipt s6-5(4) TR 98/1 Overdue accounts On accruals Ordinary business Accrual basis Division 230 TRADING INCOME Time debt becomes due. Sale/delivery of goods (J Rowe and Son Pty Ltd v FCT) Until dispute is resolved (BHP Billiton Petroluem v FCT) DIVIDENDS Derived when received OR re-invested s44-(1) TR 98/1 RENT Derived when received. Unless part of business TR 98/1 TR 2002/14 PROFESSIONAL SERVICESDepends on services (TR 93/11) LONG-TERM CONSTUCTIO 1. All progress and final payments are assessable ATO (IT 2450) 2. Estiamted profit basis ATO (IT 2450) STATUTORY INCOME: Amounts that are not Ordinary Income but ARE ASSESSABLE by other provisions (s.6-10(2)) ITAA1997 Includes: A Scheme that has the intention of MAKING A PROFIT see CLP U1 P 26 s ITAA 1997 Royalties s ITAA 1997 Disposal of Leased car for a profit CLP U1 P 27 s ITAA 1997 Defintion of car s995-1(1) ITAA 1997 The Lower of: The notional depreciation: s20-110(20)(b) ITAA 1997 number of days in lease period (Lessors orginal cost - Lessors termination value) x number of days the lessor owned car s ITAA 1997 The deductable lease charges s20-110(2)(a) ITAA 1997 The actual profit made s ITAA 1997 Interest on overpayments of Tax s ITAA 1997 ETP's - Eligible Termination Payments Division 82/ s ITAA1997 Excess of Closing Stock over Opening Stock s ITAA 1997 Disposals of Trading Stock outside Ord course of Business s70-90 ITAA 1997 Dividends s.44 ITAA 1936 Partnership Distributions s.92 ITAA 1936 Trust Distributions s.97 ITAA 1936 Deemed Dividends from Private Companies ss & Div 7 ITAA 1936 Net Capital Gains s ITAA 1997 Sale of work-in-progress (WIP) amounts CLP U1 P 28 s15-50 ITAA 1997 Reimbursed car expense s15-70 ITAA 1997 Gain on disposal of deprecating asset s ITAA 1997 Employee share scheme s83a Supperanuation benefits Division ITAA 1997 Foreign exchange gains s ITAA Income

2 EXEMPT INCOME Ordinary or statutory income that is specifically excluded from assessable income s.6-20 Includes: income of entities that are exepmt no matter what type of income it is s11-5 income which is exempt no matter who receives it s11-15 income which is exempt only if it is dervied by certain entities FOREIGN SOURCE INCOME FOR N-RESIDENTS s.6-5(3),s.6-10(5) ITAA 1997 s.23(r) ITAA 1936 INCOME EARNED IN OVERSEAS EMPLOYMENT s.23ag ITAA 1936 BRANCH PROFITS OF AUSTRALIAN COMPANIES s.23ah ITAA 1936 FRINGE BENEFITS s.23l(1) ITAA 1936 Certain Income derived from approved overseas projects s.23af ITAA 1936 s.21a (Non-cash business benefits) amounts less than $300 s.23l(2) ITAA 1936 Non-Assessable Non Exempt Income does T reduce TAX LOSSES (in the s.6-23 way exempt income does) Listed in s11-55 ITAA Fringe Benefits s23l(1) ITAA A non-protfolio return paid by a foreign company to AUS resident company that holds >10% s768-5 ITAA GST pyable on a taxable supply s17-5(a) ITAA 1997 CAPITAL RECEIPTS ARE T INCOME: Receipt more likely to be capital if: Gain relating to one-off event Amount receveid for a restrictive convenant Gain resulting from merely realising an investment Contrast: view to making a profit Transaction occuring outside of ordinary course of business and not entered with intention of making profit Lump sum (Californian Oil Products Limited v FCT) (Dickernson v FCT) (Scottish Australia Mining Co Limited v FCT) (FCT v Whitfords Beach Pty Ltd) (Westfield Limited v FCT) (McLaurin v FCT) CASH vs ACCRUALS: ACCRUALS CASH based on when income is 'earned' -Income not derived even if income is received in advance based on 'receipt of income' -can be directed by that person ss6-5(4) and 6-10(3) (Arthur Murray (NSW) Pt Ltd v FCT); (Country Magazine Pty Ltd v FCT) Note: Trading Organisations must use accruals method for that income (J Rowe and Sons Pty Ltd v FCT) Should "give a substantially correct reflex of taxpayers income" (Carden's Case) Business taxpayer use ACCRUALS BASIS where: TR 93/11 -accounting practice uses accruals -business is incorporated -business infrastrucutre dervices the income Sole Practioners can be assessed using CASH BASIS (Firstenberg v FCT); (FCT v Dunn) IT 2503 Large Accounting firms should use ACCRUALS BASIS (Henderson v FCT) In moving from Cash to Accruals, Debtors in last Cash year escape tax (Henderson v FCT) Debtors could be caputred by CGT ATO ID 2008/110 WIP not included in assessable income (Henderson v FCT); TR 93/11 N-CASH BUSINESS BENEFITS s21a(1) ITAA 1936 treast any non-cash business benefit that is not covertible to cash as if it was convertiable to cash -only applies to business relationships s21a(5) ITAA value is arm's length value less any recipient contribution s21a(2) ITAA reduced by porition that would be decutible s21a(3) and (4) ITAA Exemption of $300 s21(1)itaa Income

3 RESIDENCY Resident (ss 6-5(2), 6-10(4)) Foreign Resident (ss 6-5(3), 6-10(5)) Assessable Income All sources (worldwide) Australian Income only Tax-free Threshold $6,000 NIL Marginal Rate Lower Higher Medicare Levy Yes No Dividends, Interest & Royalties Not Subject to W/Holding Tax Subject to W/Holding Tax CGT on disposal of asset All assets (worldwide) Australian Assets only RESIDENCY TESTS FOR INDIVIDUALS s.6(1)(a) ITAA 1936 : 1.) RESIDES TEST Residency is a question of fact and not law (FCT v Miller ). Key factors to consider to support your argument Intention or pupose of visit TR 98/17 History, frequency, regularity and duration of visits ie > 6 mnths TR 98/17 FCT v Pechey Familiy and business/employment ties TR 98/17 IRC v Lysaght Social and living arrangements ie joining clubs, signs lease etc. TR 98/17 Levene v IRC Maintance & Location of Assets ie bank accounts, M/Vehicle TR 98/17 If one of the above is SATISFIED this indicates an AUSTRALIAN RESIDENT. If individual satisfies this test other test do not apply (FCT v Applegate ) 2.) DOMICILE TEST A resident is a person whose DOMICILE is in Australia. ("Domicile" can be defined as: "The permanent residence of a person; a place to which even if he or she were temporary absent, they intend to return. In law, it is said that a person may have many residences but only one domicile" PERMANENT PLACE OF ABODE The INTENDED and ACTUAL duration of the taxpayer's stay overseas FCT v Applegate IT 2650 Whether the taxpayer intends to return to Australia at some DEFINITE point in time FCT v Applegate IT 2650 Whether the taxpayer has an ESTABLISHED HOME outside Australia FCT v Applegate IT ) 183-DAY TEST s.6(1)(a)(ii) The Commissioner deems any person who has physically been in Australia for more than HALF OF THE INCOME YEAR as a resident for taxation purposes for the ENTIRE INCOME YEAR. 4.) SUPERANNUATION FUND TEST s.6(1) A person is a resident if they are a MEMBER of a SUPERANNUATION SCHEME for COMMONWEALTH GOV'T OFFICIALS. OR a spouse or child of such a person RESIDENCY TEST FOR COMPANIES s.6(1)(b) ITAA 1936: A company is a resident where it is: 1.) Incorporated in Australia; OR 2.) Not incorporated but CARRIES ON BUSINESS in Australia; AND either: TR 2004/15 a.) CENTRAL MANAGEMENT & CONTROL/OPERATIONS is in Australia; OR Koitaki Para Rubber Estate v FCT Hua Wang Bank Berhard v FCT b.) VOTING POWER is controlled by Australian shareholders/residents Conflicting case - as above says Carries on a Business "AND" TR 2004/15 vmalayan Shipping Co v FCT RESIDENCY TEST FOR OTHER: Trust depends on : residence of trustee or central management and control ss 95(2) and (3) ITAA 1936 'Australian superannuation fund' s295-95(2) 1. Residency & Source

4 SOURCE OF INCOME: Sale of Goods Place where contract was entered in CoT (NSW) v Kirk Sale of Shares Place where sale contract entered into (but other factors) Australian Machinery & Investment Co. v DFCT; TD 2011/24 Services Where work is performed. Except specialised/performed anywhere: FCT v Efstathakis and FCT v French 1 Service contract entered into FCT v Mitchum 2 Payment for services made Evans v FCT Dividend Income Source is where profits were made which the dividend is paid Esquire Nominees v FCT Australia Residents include Dividends from ALL sources s.44(1)(a) ITAA 1936 Non-Residents include Dividends derived from Aust sources only s.44(1)(b) ITAA 1936 Interest Income Source is where funds are advanced Spotless Services v FCT Interest deemed to be sourced in Australia if secured over property s.25(2) ITAA 1396 in Australia Rent from Property Sourced where real property is located Rhodesia Metals Ltd v C of T Royalties Sourced where property is located. United Aircraft v FCT If arising from intellectual property, then where contract is made or United Aircraft v FCT where the know-how was provided Australian business paying royalities = sourced in Australia s 6C ITAA 1936 FOREIGN CURRENCY TRANSLATION RULES The Australian Tax Liability for the taxpayer is required to be expressed & calculated in AU dollars This includes amounts that are on revenue or capital account, or otherwise Timing of the conversion/translation rules s s (3) s (6) 1. Residency & Source

5 DEDUCTIONS INCOME TAX = (TAXABLE INCOME x TAX RATE) - OFFSETS (s13-1) TAXABLE INCOME = ASSESSABLE INCOME - DEDUDUCTIONS (s12-5) DEDUCTIONS Division 8 of ITAA 1997 deals with deductions and contains 3 sections: s.8-1 s.8-5 s.8-10 GENERAL DEDUCTIONS SPECIFIC DEDUCTIONS see s for a LIST of SPECIFIC DEDUCTIONS ANTI-DOUBLE COUNTING RULES (Where multiple provisions allow dedn, the MOST APPROPRIATE applies) s.8-1 GENERAL DEDUCTIONS provides that a loss or an outgoing is allowed as a deduction to the extent that it is: s.8-1(1) POSITIVE LIMBS (Must be either:) s8-1 Incurred in gaining or producing your Assessable Income FCT v Smith; Amalgamated Zinc (De Bavay's) Limited v FCT s8-1 Necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income s.8-1(2) NEGATIVE LIMBS (Cannot be any of the following:) s8-1 Outgoing is CAPITAL in nature s8-1 O/g is of PRIVATE or DOMESTIC nature (only relevant to individuals) s8-1 O/g is incurred in producing EXEMPT income (i.e. prevent competition) Smithkline Beecham Lab (Au) Ltd v FCT s8-1 O/g is prevented by a provision of the ITAA Is there a Loss or Outgoing? Is it INCURRED in the current year? Does it satisfy one of the POSITIVE LIMBS? Incurred in producing Assessable Income Incurred in carrying on a business for the purposes of producing assessable income Is it caught by ANY of the NEGATIVE LIMBS? Outgoing is CAPITAL in nature Outgoing is of PRIVATE or DOMESTIC nature Outgoing is incurred in producing EXEMPT income Outgoing is prevented by a provision of the ITAA N O D E D U C T I O N Does the Expenditure only PARTLY relate to the Positive or Negative Limb? FULL DEDUCTION AVAILABLE Expense will be APORTIONED and deduction claimed accordingly INCURRED (TR 97/7) Taxpayer must be DEFINITELY COMMITTED or COMPLETELY SUBJECTED to pay James Flood Pty Ltd v FCT INSURER PROVISIONS are DEDUCTIBLE, Must be accurate estimate & likely to occur ANZ Banking Group v FCT; RACV Insurance v FCT ACTUAL PAYMENT indicates it has been INCURRED FCT v Lau EXISITNG LIABILITY to pay sum of money FCT v Citylink Melbourne REASONABLY ESTIMATED ANZ Banking Group v FCT; RACV Insurance v FCT Dispute over liability T INCURRED Softwood Pulb and Paper Ltd v FCT INTEREST: 1. Use test - funds used for income producing FCT v Munro; FCT v Robert and Smith 2. Purpose Fletcher & Ors v FCT Outgoing must be APPORTIONED were incurred for different purposes Ronpibon Tin NL v FCT; TR98/14; Fletcher & Ors v FCT; TR 95/33 Possible to allow a deduction for a portion of expediture used for mixed purposes Ure v FCT APPORTIONMENT may be required where outgoing relates to more than one year Coles Myer Finance Ltd v FCT PROVISIONS are not generally INCURRED until paid i.e.. LSL or Sick/annual leave s26-10 See s for list of provisions specifically excluded POSITIVE LIMBS s 8-1 Expenses related to CGT are not tax deductible s51aaa ITAA 1936 Carrying on business indicators TR 97/11 Regularity of activity FCT v Whitfords Beach Pty Ltd Profitability FCT v Stone Carried on in business like matter Ferguson v FCT Size, scale and permancey Thomas v FCT; FCT v Walker Cannot be described as hobby, recreation or sporting activity Evans v FCT For business deduction is one of commercial necessity rather than legal necessity FCT v Snowden & Wilson Pty Ltd Deduction to reduce further expeneses allowable W Nevill & Co Ltd v FCT Can be both employee and carrying on business Spriggs and Riddell v COT Expenses incurred prior to starting producting income unlikely to be deductible FCT v Maddalena Expenses incurred after can be deductible Placer Pacific Management Pty Ltd v FCT; FCT v Brown; CoT v Jones; 1. Deductions

6 EMPLOYEE DEDUCTIONS FOR EMPLOYEES Professional Fees Deductable ss.8-1 Employment Agreements Deductable TR 2000/5 Telephone - Business Deductable s.8-1 Interest on Loan for Investment Property Deductible s.8-1 Must be NEXUS with gain or prod income (Anovoy v FCT) Business related professional subscriptions Deductible s.8-1 Protective or occupation specific Clothing Deductible s.8-1 Home Office Expenses Deductible TR 93/30 Self Education Expenses Deductible s.8-1 and TR 98/9 Sunscreen Deductible Morris & Ors v FCT - Must be outdoors workers Club Subscriptions Not Deductable s Gym Membership Not Deductable Private in nature Newspapers Not Deductable Private in nature Telephone - Personal Not Deductable Private in nature Travel to and from work Not Deductable Private in nature - Lunney v FCT Contributions to Superfund Not Deductable s.82aat ITAA 1936 Entertainment Expenditure Not Deductable s.32-5 (FBT exemption available s.32-20) Child Care Not Deductable Private in nature s.8-5 SPECIFIC DEDUCTIONS Tax related Expenditure - 100% deductable in year incurred s.25-5 ITAA 1997 Lease Documents - 100% deductable in year incurred s ITAA 1997 Borrowing Exp: note if div 230 arrangement s ITAA 1997 Total expenditure <$100 writeen off in year inccured s25-25(6) Total expenditure >$100 written off over the lesser of 5 years or period of loan s25-25(4)-(5) WIP s ITAA 1997 Bad Debts incurred in ordinary course of business; Provisions CANT be deducted s ITAA 1997 Loss by Theft or Embezzlement s ITAA 1997 Capital Allowances - depn Assets can be written off Div.40 ITAA 1997 R&D Costs s.73b ITAA 1936 Superannuation Contributions for eligible employees to complying Fund s.82aac(1) ITAA 1936 Mortgage discharge expenses s ITAA 1997 Loss from prfoit-making undertaking s ITAA 1997 Election expenses s to ITAA 1997 Gift or contributions Div 30 ITAA 1997 Car expenses Div 28 ITAA 1997 Repairs s25-10; TR 97/23 Deductible Restore function (W Tohmas and Co Pty Ltd v FCT) Renews part of an asset (Lindsay v FCT) Does not change character (W Thomas and Co Pty Ltd v FCT) Not-deductible Improves function significantly (FCT v Western Suburbs Cinemas Ltd) Prevent future damanage (BP Oil Refiner (Bulwer Island Ltd v FCT) - still deduct under s8-1 Initial Repaid' (W Thomas and Co Pty Ltd v FCT) Prepayment rules - MUST satisfy deduction condition first i.e. s.8-1 s.82kzm Note: Prepaid Salaries and Wages (also contracts of service) are deductable when paid s.82kzl(1) 1. Amounts less than $1,000 - Immediate deductions 2. Individuals s.82kzl(1) a) Prepayment deductable when paid if the prepayment is (I) for a service period of 12 months or less (ii) that period ends during the next 12 months or less (iii) a non-business expenditure b) Otherwise allocate over the lessor of the service period or 10 years 3. STS Taxpayer s.82kzm(1) a) Prepayment deductable when paid if the prepayment is (i) for a service period of 12 months or less; and (ii) that period ends during the next financial year b) Otherwise allocate over the lessor of the service period or 10 years 4. Other Taxpayer i.e. ASX listed company s.82kzl(1) a) Allocate over the lessor of the service period or 10 years s82kzmd Expenditure x Number of days of service period in yr of income Total number of days in service period GST AND DEDUCTIONS If an ITC is available then the deductible amount will be exclusive of GST If an ITC is not available then the deductible amount will include the GST s s N-DEDUCTIBLE ITEMS (cannot deduct) Capital in Nature Sun Newspapers Ltd and Assocaited Newspapers Ltd v FCT 1. Eduring benfit 2. Once and for all vs short term 3. lump sum compared to series of sums Deductible under Div 40 Depreciating Asset Div 43 Construction of income producing buliding CGT Cost Base s Black-hole provision for over 5 years Entertainment Div.32- ITAA 1997 Except where: s.32-5 ITAA 1997 Provided as a Fringe Benefit s ITAA 1997 Taxpayer's business is to provide entertainment s ITAA 1997 Is provided in provision of G&S to the public s ITAA 1997 Entertainment Allowances are deductible s ITAA 1997 Provided in an in-house dining facility s ITAA 1997 Interest or borrowing Costs to pay income tax s.25-5(2)(c) ITAA 1997 Club Fees and Leisure facilities s ITAA 1997 Spouse Travel (unless provided as Fringe Benefit) s ITAA 1997 First $250 of certain self-education expenses s.82a ITAA 1936 TAX AVOIDANCE PART IVA ITAA 1936 DOUBLE DEDUCTIONS s.8-1 ITAA 1997 Penalties and Fines s.26-5 ITAA 1997 HECS (unless provided as Fringe Benefit) s ITAA 1997 Superannuation Contributions Surcharge s ITAA 1997 Bribes s26-52 and ITAA 1937 GST input tax credits s27-5 ITAA 1946 Leave only deductible when paid out s26-10 ITAA Deductions