Deductions. Accessible Income (s6(1) ITAA 97) Income Tax = AI Deduction Tax payable = (taxable income x tax rate) tax offsets)

Transcription

1 Income Tax = AI Deduction Tax payable = (taxable x tax rate) tax offsets) Accessible Income (s6(1) ITAA 97) Deductions A1. Ordinary Income (s6-5) A2. Statutory Income (DIV 6) D1. General Deductions D2. Specific Deductions A3. CGT

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3 1. A1. Ordinary Income Everyday usage of man-kind, dictionary definition (Scott v C of T (NSW) (1935)) Therefore, it s a weighing up of everything, that should be determined with ordinary concepts, except in so far as statute dictates otherwise. Whether the payment received constitutes depends on a close examination of all the relevant circumstances (The Squatting Investment Co Ltd v FC of Tax (1953)). This test is objective (Hayes v FCT It is considered to be ordinary if it is: Cash or Cash Convertible (Cooke v Sherden (1980)) Real gain - not just a reimbursement (Hochstrasser v Mayes (1960)) Regular/Periodic Assessed from the person who received the money 1. Cash or Cash Convertible (Cooke v Sherden (1980)) Cooke v Sherden (1980) Receipt of non-cash-convertible holiday (not Ordinary Income) Tax Payer sold drinks door to door. The Tax Payer received a free holiday from the soft drink manufacturer as a result of them selling a certain number of drinks. The holidays were non transferrable Could not be sold. NOT ORDINARY INCOME HELD: It was held that amounts that cannot be converted to cash are not in ordinary concepts, and s 21 of the Act could not give a money value where the non-monetary consideration could not be converted into cash or the right transferred to a third party. Note: FFC followed the principle in the case of Tennant v Smith (1892) that because holidays not cash convertible could not be ordinary. Tennant v Smith (1892) The Tax Payer was an agent for a bank and lived in free accommodation supplied by the bank. The TP was not allowed to sublet the accommodation. Neither cash nor cash convertible. Not Ordinary Income. The question is how easily can I be exchanged for cash, not whether it can be transferred or not (In regards to FF points and free flights not OI (Payne (1996))

4 2. It must be a real gain - not just a reimbursement (Hochstrasser v Mayes (1960)) Hochstrasser v. Mayes (1960) ð Reimbursement for work-related loss when moving not assessable, not a real gain Tax Payer Employer required him to move cities Tax Payer sold his house in city he was leaving and received less than he had paid for it. The employer reimbursed him for the loss. House of Lords held NOT assessable It was not a real gain because he had just been compensated for work related expense. What if it was not work related? Receipt then would have been a real gain Tangible gain of reward, or bringing him back to the original position. The HOL said that it was compensation à therefore, it falls within a personal services, however, he is no better off and therefore, just no real gain. 3. Regular/Periodic à more likely to be an ordinary than a lump sum If something flows more likely to be an ordinary. In FCT v Dixon (1952) the court relied n the periodic nature of the payments to find that the payments ere in ordinary concepts. FCT v Blake (1984) à regularity among other things shows 4. If it s a once-off payment, more likely to be gratuity or capital in nature (FCT v Harris (1980) a. In addition, the courts have held that if a receipt of an amount saves a taxpayer from incurring expenditure, then this doesn t necessarily make the receipt ordinary because is what comes in, it is not what is saved by going out : FC of T v Cooke & Sherden (1980) 42 FLR 403, 80 ATC 4140, 4149 Constructive receipts The amount of must be characterized as ordinary in the hands of the person who derived it Federal Coke Co P/L v Federal Commissioner of Tax Bellambi Coal Co Ltd coal produced (produced coke, fuel). This was done through its subsidiary companies, Federal Coke was one of these subsidaries producing the coal/coke. Bellambi entered into many contracts for the supply of this material on behalf of Federal Coke Economic downturn and Federal Coke had issues. As result of downturn one Co that FC contracted with, Le Nickel, could not pay full contract price. à Contract was varied and agreement reached to pay FC $1m comp, and FC activities then ceased. Was the $1m OI? Initially payment made to Bellambi they were advised would be AI, so they arranged for it to be made to FC instead Commissioner assessed FC for the amount as Full Federal Court held not assessable à said that receipt not compensation because Le Nickel did not have contractual obligations with FC that would have made them owe compensation àlack of dealings between FC and LN meant could not be OI from dealings as business

5 However, looking at the situation whereby, the Commissioner had assessed Bellambi, and not Federal Coke. Than the money have been assessable in Bellambi hands, this would have been through concept of constructive receipt (it can be argued that they constructively received compensation payment and redirected it to FC). Important point: that constructive receipt of a payment that would have been ordinary if it had actually been received will constitute OI. S 6-5(4) also deals with this taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct Illegality The fact that a receipt is from an illegal activity, does not mean it is not assessable. It is assessable provided it would have been assessed if the activity was legal. For example, assessed on proceeds of drug dealing (we also come back to this when consider deductions and La Rosa). Lindsay v IR Comms and TR 93/25 Summary Ordinary Income Cash or convertible to cash Real Gain Regular or periodic Flow Application Income from property Personal services Business Compensation Ordinary Ordinary Ordinary illegal transactions Statutory Statutory Statutory Constructive receipts

6 a. INCOME FROM PERSONAL SERVICES An amount will be "ordinary" personal exertion if it is a product or incident of the employment of the person or a reward for services rendered by the person. An amount is ordinary, and therefore may included in assessable under s 6-5(1) ITAA97, if there is a sufficient nexus between the amount and an earning activity. Where a receipt or benefit accrues directly by virtue of the taxpayer s office, it will constitute (commonly referred to as from personal services): Moorhouse v Dooland [1955] 1 All ER 93 In characterising an amount, the court will not confine itself to the form of the supporting documentation, but rather will look at the whole of the circumstances surrounding the receipt. As long as the remuneration shows a nexus to the labour of the taxpayer, it does not matter whether the remuneration is for past, present or future services: Hochstrasser v Mayes [1960] AC 376; Nor does it matter that it is paid by a third party, rather than the recipient of the services: Kelly v FCT (1985) 16 ATR 478 Nexus with services Establishing that there is a nexus between amount received, and the work or services performed, is essential! You need to establish this to determine that the receipt is ordinary (6-5). WAGES ( ) à NEXUS UNCERTAIN (?) à GIFTS (X) What steps help in this analysis? 1. Identify the work or the service that is being performed. 2. Discuss whether the payment/goods etc was given as a result of those services being performed. 3. Use cases to support your argument You can also query whether the receipt arose out of any other circumstances: FCT v Harris (can also use re gifts) Mr Harris was a retired bank employee Received one off payment $450 from bank as a pension top up to reduce effects inflation Majority of FFC held that not a product of past, current employment and not OI Also stated was once off, which was not determinative but a consideration NB may be assessed 27H statutory (cover this later)

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