P a g e 1 Ordinary Income Tax is payable by each individual, company and by some other entities: s 4-1 ITAA97. Income tax is payable for each year ending on 30 June: s 4-10(1). In calculating a taxpayer s income tax payable for an income year, the formula (s 4-10(3) ITAA97 is: Income tax = [Taxable Income * Tax Rate] Offsets. The taxable income formula (s 4-15(1)) is: Taxable Income = Assessable Income Deductions. Assessable Income is provided in s 6-1(1) as Assessable Income = Ordinary Income +Statutory Income. Ordinary Income is income according to ordinary concepts something everyone would consider as income. If a receipt is both ordinary income and statutory income, statutory prevails. - Your assessable income includes income according to ordinary concepts, called ordinary income: s 6-5(1). It is income according to the ordinary usages and concepts of mankind : Scott v C of T (NSW) (1935) 35 SR 215. Ordinary income is traditionally divided into income from personal exertion and income from property. Income from personal exertion is defined in s 6(1) ITAA36 to include (also reference s 6-5): o Salaries, wages, commissions, fees, bonuses, pensions, allowances, superannuation and gratuities o Frequent Flyer points aren t income: Payne v FCT 96 ATC 4407 Income from Property (s 6-5 ITAA97 and s 6(1) ITAA36): interest, Annuities, Rent, Royalties Business Income is Ordinary Assessable income: s 6-5 ITAA97. Section 995-1 ITAA97 provides an inclusive definition of business to include any profession, trade, employment, vocation or calling, but does not include employees. - Taxation Ruling TR 97/11 and Ferguson v FCT (1979) 9 ATR 873, 876 prove business indicators as 1) more than just an intention to engage in business, 2) TP has purpose of profit and prospect of profit, 3) repetition and regularity - Non cash business benefits are treated as if they were convertible to cash: s 21A ITAA36. - Diversification through a new activity (selling capital assets, like land): FCT v Whitfords Beach P/L 83 ATC 4277 - Isolated Transactions two factors required 1) transaction and profit was made in the course of business AND 2) the intention of entering the transaction was to make a profit: FCT v Myer Emporium Ltd; Westfield Ltd v FCT Week 5 General Deductions section 8-1 ITAA97. Section 8-1 allows an immediate deduction to the taxpayer if: s 8-1(1)(a) it is incurred in gaining or producing your assessable income; OR s 8-1(1)(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. - You cannot deduct a loss or outgoing of capital nature(s 8-1(2)(a); of a private or domestic nature (s 8-1(2)(b); incurred in producing exempt income (s 8-1(1)(c); other provision prohibits it: s 8-1(1)(d) Food and drink No FCT v Cooper (1990) 21 ATR 525 Clothing TR 97/12 not if of a private or domestic nature, unless registered non-compulsory uniform (Div 34), occupation specific (e.g. nurse s 34-21), Protective Clothing: s 34-20(2) These are deductible under 8-1 Travel from home to work private, no: Lunney v FCT UNLEES bulky equipment: FCT v Vogt Home office expense only running costs (electricity, depreciation etc) if convenient to work from home (Handley v FCT) and occupancy costs (rent etc) if conducting business: Swinford v FCT; TR 93/30 provides factors Apportionment - to the extent apportion to the actual business use Week 6 - Specific Deductions Repairs, Borrowing Costs, Tax related expenses, Bad debts, Depreciating Assets Special Rules for deductions - Even if a taxpayer cannot satisfy section 8-1, they may still be able to claim the expense under a specific deductibility provision outside of Division 8: s 8 5 ITAA97. - You cannot get a double deduction, with specific deductions considered first: s 8-10 1) Repairs s 25-10 Section 25-10(1) allows a deduction for expenditure that you incur for repairs to premises (or parts of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income. - You do not need to own an asset in order to get a deduction for repairs; but must be held for producing income. Three requirements: 1 st Requirement That there is a repair A repair involves restoration of a thing to a condition it formerly had without changing its character and the question of what is the entirety, and what is only part depends on the facts: W Thomas & Co Pty Ltd (1965) 115 CLR 58 A repair involved replacement or renewal of part of an item, rather than the entire item: Lurcott v Wakely and Wheeler. TR 97/23 Question is to be answered in light of all the circumstances. 2 nd Requirement - That the item is held or used for the purpose to produce assessable income 3 rd Requirement That the expenditure is not capital The expenditure is not a repair and is capital if it is an: Improvement Non-deductible - If expenditure improves the item, then it is regarded as capital expenditure and it is not deductible as a repair: FCT v Western Suburbs Cinemas Ltd (1952) 86 CLR 102. - Note that if the renewed material is different to original this is not decisive it is the restoration of function that is important Addition or Alteration Non-deductible - If alterations or additions are carried out, then the expenditure is not a repair. ENSURE you separate out any repair from any alteration or addition to keep the deduction for the repair. Initial Repair Non-deductible - Initial repairs are regarded as non-deductible by the ATO in TR 97/23 where the defect, damage or deterioration existed at the time of acquisition of the property AND did not arise from the operations of the person who incurs the expenditure.
P a g e 2 2) Borrowing Costs s 25-25 If a taxpayer borrows funds for income producing purposes, then the interest on the loan is a general deduction under s 8-1: FC of T v Munro. However, borrowing costs such as bank charges, valuation fees, stamp duty are capital: s 8-1 Deductible: - Interest on loan to purchase shares / business Non-deductible - Interest on home loan (when home office only for convenience) - Interest on car loan for a car used to travel to work. Section 25-25 provides a specific deduction for expenditure used in borrowing money (i.e. bank charges etc) as follows: - If borrowing costs <$100, deduct all in first year; - If >$100, deduct them over the period of the loan or 5 years, whichever is less (from date of receiving loan) You can only claim the proportion related to the income producing use. The equation is: $x,xxx (borrowing cost) * (x (number of days in current income year)/ x (total days in loan/5 years) = $answer - Example: $2,500 * (122/1,461) = $208 for first year. 3) Tax related Expenses s 25-5 Section 25-5 ITAA97 allows a deduction for tax related expenses IF paid to a registered tax agent or legal practitioner (exceptions for BAS agents registered under the Tax Agent Services Act 2009). 4) Bad Debts 25-35 Section 25-35 allows a deduction for a bad debt that you write off in an income year if it was included in your assessable income for that year or is in respect of money lent in the ordinary course of business. - This deduction is not available for taxpayers who record income on the cash basis. To claim, XXX must satisfy 4 requirements in s 25-35(1) 1) There is a debt in existence at the time the taxpayer is trying to write it off; 2) It must be bad reasonable business person would regard it as unlikely to be repaid: G E Crane Sales P/L v FCT (1971) 126 CLR 177 3) Must be written off in the income year (evidence in writing and a signed resolution: Point v FCT (1970) 1 ATR 577 4) Must have been included in the taxpayers assessable income, or in money lent in the ordinary course 5) Depreciating Assets (Capital Allowances) Section 40-25(1) allows a deduction for an amount equal to the decline in value for an income year of a depreciating asset that was held for anytime during the year, however the reduction must be proportionate to its use for a taxable purpose: s 40-25(2). Taxable Purposes in s40-25(7) includes the purpose of producing assessable income. 1 st Requirement: There must be a depreciating asset: s 40-30 - An asset that has a limited effective life and is reasonably expected to decline in value, but does not include land, trading stock or certain intangible assets - It can apply to fixtures or improvements to land, but not if they are an integral part of the structure of the premises: Woodward v FCT [2003] AATA 4 2 nd Requirement: It must be held: s 40-40 - Only the holder of a depreciating asset can claim the deduction: e.g. legal owner, lessee, lessor ((if they have right to recover it. Two methods available to calculate deduction: Diminishing Value (s 40-70) and Prime Cost (s 40-75) decided when the first tax return is lodged. In exam we just use Diminishing Value. We need to know the: Start Time When the taxpayer first uses it, or has it installed ready for use, for any purpose: s 40-60. Cost Initial cost of acquisition, including transportation costs any ongoing improvement costs: ss 40-176 40-230 The cost is GST inclusive if the taxpayer is registered for GST: s 27-80. TP is entitled to GST refund. If the asset is a car, the limit of value is $57,466: s 40-230 Effective Life Taxpayer can choose either determination by Cmr (s 40-100) or to work it out themselves (s40-105). Calculation is: Pre 9 May 2006 Asset (s 40-70): Base Value * (days held/365) * (150%/effective life) = XXX Post 9 May 2006 Asset (s 40-72): Base Value * (days held/365) * (200%/effective life) = XXX Multiply amount by proportion used. Base Value for following year is cost less previous year s depreciated amount. 6) Disposal of Depreciating Asset Where the asset is disposed of prior to all of the cost being depreciated, a balancing adjustment must be made, unless it was sold for the written down value (i.e. depreciated value). If the selling value was greater (gain) than the adjusted value, record this as assessable income (s 40-285(1)). If the adjustable value was greater than the selling price (loss), record this as an allowable deduction (s 40-285(2)). If an asset was only used partly for business purposes, then apportion for the business use portion - There is an immediate deduction for assets <$300: s 40-80(2) (only for non-business taxpayers) - Business Taxpayers, NOT small business entities, pool assets together costing < $1,000 and calculate capital allowance under subdivision 40E. All pooled assets are put together and depreciate for 4 years: s 40-425 7) Capital Works s 43-210 different to Capital Allowances Weeks 7 and 8 Capital Gains Tax 1) General GST Concepts Any resulting net capital gain is added to the taxpayer s assessable income: s 102-5 ITAA97. A taxpayer acquires a CGT asset when they become its owner: s 109-5(1).
P a g e 3 CGT applies to assets acquired after 20 September 1985 and are referred to as post-cgt assets. Before this, they are referred to as pre-cgt assets. A taxpayer becomes liable for tax when they dispose of a CGT Asset. - Capital losses are quarantined Capital losses can only be offset against capital gains; they cannot offset normal assessable income (s 102-10(2)) and capital losses that are not used in the present year are carried forward (but not losses from personal use assets). 2) Residency of the Taxpayer Foreign resident taxpayers will only be taxable in Australia on Capital Gains relating to assets that are taxable Australian Property under division 855, but Australian residents are liable for capital gains on ALL CGT assets. - CGT events happening on or after 12 December 2006, there are 5 categories of taxable Australian Property: o Taxable real property as defined in s 855-20 o Indirect real property interests as defined in s 855-25 o Business assets of Australian branches of a foreign resident o An option or right to acquire a CGT Asset covered by any of the above categories. 3) CGT-the Steps 1) Did a CGT event happen in the income year? There are 10 CGT events, the main one is CGT Event A1 disposal of a CGT Asset. For this event: Disposal: Disposal occurred if there is a change of ownership from the TP to another entity: s 104-10(2). Timing: The event is taken to occur when a contract for the disposal is entered into, or if there is no contract, when the change of ownership occurs: s 104-10(3) - In AAT Case [2013] AATA 76 held that event A1 occurred when Heads of Agreement was executed, not contract Capital Gain: if capital proceeds > cost base: s 104-10(4) Capital Loss: if capital proceeds < than reduced cost base: s 104(10)(4). Disregard capital gain/loss if asset acquired before 20 September 1985: s 104-10(5) 2) Does it involve a CGT Asset or was there a capital receipt? Pre 26 June 1992 Assets If the TP has an asset that was created after 19 September 1985 but before 26 June 1992 AND the asset is a legal or equitable right that is not property, the capital gain or loss is disregarded. Post 25 June 1992 Assets Section 108-5(1) defines a CGT asset to mean any kind of property, or a legal or equitable right that is not a property. There are three categories of CGT Assets: - Collectables Includes artwork, antiques, jewellery, coins and stamps, kept mainly for the personal use or enjoyment of the Taxpayer (not for business of profit making purposes): s 108-10(2). o Gains or losses from collectables with acquisition cost of < $500 are disregarded: s 108-10(1), unless the asset is part of a set, then it is assessed together: s 108-15 o Capital losses from collectables can only be offset against capital gains from collectables: s 108-10(1) o Unused capital losses carried forward & applied against future collectable capital gain/loss: s 108-10(4) - Personal Use Assets CGT assets (other than collectables) used personally by the taxpayer: s 108-20(2) e.g. a yacht. o If acquisition cost < $10,000, the capital gain is disregarded: s 118-10(3), unless part of a set: s 108-25. o Capital losses from personal use assets can only offset other PU asset capital gains: s 108-20(1). - Other Assets - Include assets that Year Quarterly CPI Number Quarterly CPI Number 31 March 30 June 30 Sept 31 Dec 31 March 30 June 30 Sept 31 Dec 1985 - - 39.7 40.5 1992 59.9 59.7 59.8 60.1 1986 41.4 42.1 43.2 44.4 1993 60.6 60.8 61.1 61.2 1987 45.3 46.0 46.8 47.6 1994 61.5 61.9 62.3 62.8 1988 48.4 49.3 50.2 51.2 1995 63.8 64.7 65.5 66.0 1989 51.7 53.0 54.2 55.2 1996 66.2 66.7 66.9 67.0 1990 56.2 27.1 57.5 59.0 1997 67.1 66.9 66.6 66.8 1991 58.9 59.0 59.3 59.9 1998 67.0 67.4 67.5 67.8 1999 67.8 68.1 68.7 (2) Multiple the eligible expenditure by the relevant indexation factor and then add the indexed costs together, along with the non-indexable costs (to calculate the indexed cost base) (3) Calculate the indexed capital gain (capital proceeds minus the indexed cost base. If there is a positive balance there is an indexed capital gain. If there is a negative balance, taking into account inflation, there is no capital gain. Example Answer Capital GAIN (and loss below), indexation and discount method)
P a g e 4 Violet signed a contract to purchase a holiday home at Coolum on the Sunshine Coast from a private seller for $128,000 on 14 August 1991. At settlement on 24 September 1991 Violet was also liable to pay stamp duty of $5,650 and legal fees of $800. Violet was able to meet all of these costs without borrowing any money as she came from a wealthy background. In August 2004, Violet had to pay $2,200 (including GST) to replace the glass in a large window, which had developed a big crack in it after a seagull accidentally flew into it. In November 2007 Violet paid $35,000 (including GST) to have a large deck added to the rear of the holiday home, which added to the value of the holiday home as it considerably enlarged the usable space. In July 2009, Violet paid $10,000 (including GST) to have her holiday home repainted as the original paint had become badly deteriorated over the years. Finally in March 2011, Violet paid $26,000 (including GST) to renovate the kitchen and bathroom, which added to the value of the holiday home as it modernised it. As a result of ill health, Violet decided in 2016 that she could no longer use the holiday home so she decided to transfer it to her daughter Rosa as a gift. Violet caused the transfer to be made on 20 May 2016. At the time of the transfer the market value of the holiday home was $820,000. Violet incurred a number of costs to effect the transfer of her property to Rosa including transfer duty of $22,750, legal fees of $1,250 (including GST), and $550 (including GST) in valuat ion fees. Note that in relation to Violet s ownership of her holiday home, she incurred the following expenses: Expense Amount paid for the 2015/16 income year Insurance premiums (including GST) $1,300 $17,400 TOTAL amount paid over Violet s entire ownership period (including the 2015/16 income year) Council rates $1,700 $27,600 Note: At no stage throughout her ownership period did Violet rent out the holiday home, nor did she use it as her main residence. Assume that Violet can substantiate all of the listed expenses. Question 1 Capital Gain on transfer of house, indexation and discount method. 1 - Did a CGT event happen in the income year? Yes, Violet disposed of her holiday home by gifting it to Rosa. CGT event A1 occurred because there was a change of ownership in the apartment from Violet to Rosa: s 104-10(2) ITAA97.The timing of the CGT event occurred when the contract for disposal was entered into on 20 May 2016: s 104-10(3). 2015/16 is the relevant income year given the timing of the CGT event. 2 - Did the CGT event involve a CGT asset or a capital receipt? The house and land together is a kind of property, which is a CGT asset: section 108-5(1)(a) ITAA97. Of the 3 types of CGT assets, the house and land together will be an other asset because it is not a collectable or personal use asset: section 108-5 ITAA97. Violet s improvements to the house, including the large deck and renovations, would not be separate CGT assets under s 108-55 ITAA97 as they do not exceed the threshold in s 108-85 ($143,392-2015/2016: TD 2015/13). 3 - Does an exemption apply? The exemption for disposal of pre-cgt assets will not apply as the land is a post-cgt asset: s 104-10(5)(a). The house and land are not exempt and disregarded under s 108-10 or s 118 ITAA97 as they are not a collectable or personal use assets. Further, the main residence exemption also does not apply as the house is a holiday home and it is implied that she has another residence: s 11 8-110 ITAA97. From the facts, a partial exemption would not apply either: s 118-185. 4 - Can the taxpayer defer the gain by using a rollover provision? Violet cannot defer the gain using a rollover provision as she does not appear to be a small business owner. 5 Is there a prima-facie capital gain or a capital loss? The capital proceeds are greater than the cost base so there is an initial capital gain. Capital Proceeds $820,000 s 116-20/ s 116-30 ITAA97 Less Cost Base 1 st Element Acquisition Costs: s 110-25(2) Acquisition cost $128,000 s 110-25(2) 2 nd Element Incidental Costs: s 110-25(3) Stamp Duty (buy) $5,650 s 110-35(4) Legal Fees (buy) $800 s 110-35(2) Transfer duty (disposal) $22,750 s 110-35(3) Legal Fees (disposal) $1,250 s 110-35(2) Valuation fees (disposal) $550 s 110-35(6) 3 rd Element Costs of Ownership: s 110-25(4) As Violet acquired the property before 20 August 1991, this element is not included in Cost Base. Window (repair) $0 s 110(25(4)(b) Repainting (repair) $0 s 110-25(4)(b) Insurance $0 s 110-25(4)(b) Council rates $0 s 110-25(4)(e) 4 th Element Capital Expenditure to increase/preserve value: s 110-25(5) Deck $35,000 s 110-25(5) Renovation $26,000 s 110-25(5) 5 th Element Defending title: s110-25(6) None $0 Cost Base $220,000 s 110-25(1) Initial Capital Gain $600,000 s 104-10(4)
P a g e 5 Violet has an initial capital gain of $600,000 on the transfer of her holiday home. We now have to consider her eligibility for the indexation and discount methods. Violet is an individual and she acquired the apartment in August 1991 and disposed of it after 11:45am EST 21 September 1999. Question 18 Trust Income (MINOR, LITO ENTITLEMENT, COMPANY W BALANCE/ CG and DIVIDEND Part (a) Ellie a minor (legal disability), in between unearned income threshold Generally, a resident beneficiary of a trust who is presently entitled to trust income must include that income in their income: s 97(1) ITAA36. However, where the beneficiary is presently entitled to income from a trust and is under a legal disability, the income is assessable in the hands of the trustee: s 98 ITAA36. Elliue is presently entitled as $770 has been distributed to her, but she is under a legal disability as she is under 18 and thus a minor: Taylor v FC of T (1970) 119 CLR 444. Therefore, Howard Jones, the trustee, is assessable on the $770 as if he were Ellie. In this case, the special taxation rules for minors will apply as a trust distribution is unearned income (Eligible Taxable Income) of a minor for the purposes of Div 6AA of the ITAA36. Ellie would be a prescribed person for the purposes of Div 6AA. Trustee assessed (as if he were Ellie Trust income (ETI) $770 s 98 ITAA36 Less Allowable deductions $0 Taxable Income $770 BITL: (0.68* (770-416) = $240.72 $240.72 Div 6AA, s 13 ITRA86 Les Non-refundable offsets LITO? Nil S 159N ITAA36 even though TI<$37,000, minors are prohibited from using the LITO in respect of ETI from 1 July 2011 Net tax Payable $240.72 Plus Medic are Levy (TI*2 %) Nil s251s ITAA36 (TI < $21,335) Less Refundable Offsets/Tax credits $0 Tax Payable $240.72 Part (b) Nellie Adult, entitled to LITO A resident beneficiary of a trust who is presently entitled to trust income and is not under a legal disability must include that income in their assessable income: s 97(1) ITAA36 Trust income $40,000 s 97(1) ITAA36 Less allowable deductions $0 s 8-1 ITAA97 Taxable Income $40,000 BITL [(40,000 - $37,000)] *.325] +$3,572 $4,547 Less Non-refundable offsets LITO = $445 [(40,000 37,000) *0.015] = $400 s 159N ITAA36 ( $37,000 < TI < $66.667 Net Tax Payable $4,147 Plus Temporary Budget repair levy Nil s 4-11 ITTPA97 (TI <$180,000) Medicare Levy (TI*2%) $800 s 251S ITAA36 (TI > $26,668) Part of package Base Salary of $42,000 Leased company car worth $26,000 Entertainment Allowance of $2,000 Superannuation of 10% Car phone costing $500 with all accounts paid. FBT treatment FBT taxable value Type 1 benefit Type 2 benefit Wages excluded from being a benefit so no FBT consequences. Car fringe benefit if available for private use. It would be a new commitment (as at January 2015. Note the deeming of private use if garaged at employee s home: s 7(2). An allowance is part of wages, and excluded from being a fringe benefit in s 136(1) so no FBT. Excluded from being a fringe benefit in s 136(1) so no FBT consequences. Is an exempt fringe benefit if it is primarily for use in employee s employment: s 58X(2)(a) will assume so. Statutory method: ($26,000 x 0.20 * 366 / 366) - 0 = $5,200 Operating cost method: BP = 5,142km = 30.25% 17,000km $10,750 x (100% - 30.25%) = $7,498 Use statutory method Likely to be Type 1 if employer can claim GST input tax credit on car lease payments $5,200
P a g e 6 Part of package Professional Journal subscriptions $300 Airline lounge membership $400 TOTAL taxable value (Type 1) Multiply by Gross up Multiple by FBT rate Total FBT payable by employer Reportable fringe benefit amount on Luke s PAYG Payment Summary FBT treatment FBT taxable value Type 1 benefit Type 2 benefit Exempt fringe benefit (s 58Y) Exempt fringe benefit (s 58Y) $5,200 0 2.1463 1.9608 $11,161 0 49% 49% $5,469 0 $5,469 $5,200 x 1.9608= $10,196