Federation University 代写 BULAW 5916 TAXATION- LAW AND PRA
Federation University – Business School
BULAW 5916 TAXATION- LAW AND PRACTICE
LECTURE GUIDE – TOPIC 2 – Part 1
INCOME, RESIDENCY & SOURCE, DERIVATION
Understanding Taxation Law –
Chapters 3 & 4
Australian Taxation Law
Chapters 3 - 6
Over the next couple of weeks we will examine the following:
ORDINARY INCOME & STATUTORY INCOME
Ordinary Income Propositions
Business Income/Isolated Transactions
Statutory Income (excluding Capital Gains Tax)
RESIDENCE, SOURCE & DERIVATION OF INCOME
Residency by Ordinary Concepts
Domicile & Permanent Place of Abode
Source of Income
Derivation of Income
Tax is imposed on taxable income.
Taxable income is assessable income less deductions.
Assessable income includes ordinary income from all sources [for residents].
Ordinary income is not defined so takes on its ordinary (judicial) meaning.
Assessable income also includes statutory income which, by definition, is identifiable and calculated as directed by the statute.
The phrase ‘ordinary income derived from all sources’ (in ITAA97 s 6-5) formerly read ‘gross income derived from all sources’ (ITAA36 s25(1) from which it may be concluded that the meaning of ‘ordinary income’ has the same meaning given to the words ‘gross income’ [see ITAA97 s1-3].
One way to think about income is to advance propositions about what it is and what it is not. Another approach is to examine different categories of receipts or gains – income from business; income from property. Australian Taxation Law
has elements of both approaches. The following propositions are gleaned from judicial consideration of the income concept as it developed under the ITAA36:
Negative propositions; items that are not income by ordinary concepts
1. Amounts not convertible into money are not income
2. Capital does not have the character of income
3. Mere gifts are not income
4. Proceeds of gambling and windfall gains are not income
5. Mutual receipts are not income
Positive propositions; characteristics of income by ordinary concepts
6. To be income, an amount must be beneficially derived
7. Income is to be judged from the character it has in the hands of the recipient
8. Income generally exhibits recurrence, regularity and periodicity
9. Amounts derived from employment or the provisions of services are income
10. Amounts derived from carrying on a business are income
11. Amounts derived from property are income
12. Amounts received as substitutes for or compensation for lost income is themselves income
Negative propositions - distinguishing income
# 1: Convertibility to money
In Tennant v Smith
(1892) free accommodation provided to a bank manager was held not to be ordinary income because building could not be sub-let(转租) and the benefit thereby converted to money. In FCT v Cooke & Sherden
(1980) an incentive prize offered by a manufacturer was not income of the winning retailers because it was not transferable and so not convertible into money.
• Unresolved issue: what is the fundamental issue: convertibility or legality of conversion? [Probably the former; illegal gains have long been regarded as ordinary income.]
century income tax with a cornerstone that an amount was not ordinary income if it was not convertible into money would be unworkable. But that remains the law as the courts see it. To change
that law required statutory responses,
not all of which have always been successful. [Remember, statute law
overrules case law.]
There have been several statutory responses to the convertibility issue:
- First, ITAA36 s26(e) [now ITAA97 s15-2].
- Second, Fringe Benefits Tax [[FBT].
: Today, for employees, the benefit in Mr Tennant’s case would be a ‘housing fringe benefit’, taxable to the employer under the Fringe Benefits Tax Assessment Act.
# 2 Capital receipts are not income
For business taxpayers, s21A [ITAA36] deems such income-like amounts to be convertible into money and so assessable under s6-5 as ordinary income. [That is, the statute overrules the case law.] [Read s21A: ATL 3-150]
At law there is a fundamental distinction between income and capital. The distinction is grounded in UK trust law where different beneficiaries might have entitlements to income and capital of a trust, so the courts had to distinguish what amounts were incomes and what was capital. The legacy is that if an amount is capital, it is not ordinary income.
There are (at least) two ways of approaching the issue:
1. From UK case law comes the California Copper
principle [affirmed by HCA in Myer Emporium
~ a ‘mere realisation’ of an asset, produces a capital
2. From Australian case law comes the Sun Newspapers
case and the income/capital dichotomy
; often called ‘Dixon’s Criteria’.
(‘dichotomy’ = division or classification into two [parts]).
For tax law purposes we need to distinguishing income and capital for several reasons:
ordinary concepts notion of income does not include capital; [see below]
general deductions [and some specific deductions, eg: repairs] specifically excludes deductions for capital outlays
capital receipts may generate capital gains à CGT; concessional tax treatment; the gain might be discounted by 50%.
trust distribution of corpus [capital] is not assessable income.
The dichotomy(一分为二) between income and capital underpins UK and Australian (and several other common law countries’) revenue law.
1. California Copper
It is quite a well settled principle....that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit....assessable to income tax. But it is equally well established that enhanced values....may be so assessable when what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.
2. Sun Newspapers:
In Australia the leading case for distinguishing income and capital is Sun Newspapers.
It distinguishes a capital structure
and the process
of operating that structure. This can be illustrated using the US case of Eisner v Macomber
where a distinction was made between a tree [structure
] and the fruit it produced [process
]. The sale of the fruit produces income
Compensation for the loss of the fruit produces income
. Proceeds from the sale or compensation for the loss of the tree is capital.
The cost of acquiring the tree is capital.
Costs connected with producing the apples is a process
Dixon J considered there was a symmetrical application of the dichotomy between s6 & s8: ie, a receipt that is structure (capital) related is not ordinary income; a payment that is structure (capital) related is not deductible under s8-1. See Dickenson v FCT
(1958) 98 CLR 460.]
Whether an amount is structure or process
related can be determined by considering the following:
~ What is the character of the advantage lost or sought?
- is it lasting or temporary?
~ How the item is used?
- is it recurrent(循环的)?
~ How it is paid for?
- is it periodical or one-off?
• In general terms it may be stated that capital receipts and profits arising from the mere realisation of a capital asset are not income but where what is done is truly the carrying on of a business, the proceeds will be on revenue account: California Copper Syndicate Ltd v Harris (Surveyor of Taxes)
(1904) 5 TC 159; FCT v Myer Emporium Ltd
(1987) 163 CLR 199; 87 ATC 4363.
• Payments received for the loss or sterilisation of profit making structure will be on capital account; Heavy Minerals Pty Ltd v FCT
(1966) 115 CLR 512; 10 AITR 140; but payments incidental to operating a business are on revenue account; London Australia Investment Co Ltd v FCT
(1977) 138 CLR ; 77 ATC 4398.
• An isolated transaction entered into with the intention of making a profit will produce a revenue amount: FCT v Myer Emporium Ltd
; FCT v Whitfords Beach Pty Ltd
(1982) 150 CLR 355; 82 ATC 4031. The application of the income/capital dichotomy to employment or the provision of services or from carrying on a business are income are considered under Propositions 9 and 10 respectively.
Circulating and fixed capital
The accounting distinction between fixed and working or circulating capital provides a workable but imperfect basis for applying the income-capital distinction
The courts have referred to the circulating-fixed asset distinction a number of times and nominated several items that fall within the ambit of each term but there is no definitive statement of its relevance and application to the broader distinction between income and capital. Fixed capital is that from which a return on operations is expected. The return from operations is in the form of working or circulating capital: BP Australia Ltd v FCT
(1965) 112 CLR 386; 9 AITR 615; AGC (Advances) Ltd v FCT
(1975) 132 CLR 175; 75 ATC 4057. Losses of circulating capital such as debts and expenditure to acquire items of circulating capital, such as trading stock, are on revenue account. Receipts from transactions that are made in the ordinary course of a business are clearly on revenue account and receipts arising from the mere realisation of an investment are on capital account: California Copper Syndicate Ltd v Harris
(1904) 5 TC 159; Commr of Taxation v Myer Emporium Ltd
(1987) 163 CLR 199; 87 ATC 4363. Thus, the sale of (fixed) capital assets will generate a capital receipt. Sale of trading stock and revenue assets will produce an income receipt. Whether an item of circulating capital is a capital or revenue asset depends on the nature and scope of a particular business.
The Income/Capital Dichotomy Applied [ATL 3-280]
Sale of ‘know how’/licences
– provision of exclusive licence is capital; simply exploiting a licence is likely to be income. The grey area is where a person does not dispose of a patent (or other property) but grants a non-exclusive licence. The receipt is likely to be income, but the greater the rights surrendered, the more likely the receipt is capital. [Sale of a patent or copyright will have CGT consequences.]
Cancellation of agreements
character of the payment turns on whether there is a loss of income [process] or the loss of a right or capacity to earn income [structure]
See Heavy Minerals Ltd v FCT
(1966) - cancellation of supply agreement ultimately forced the company into liquidation à capital. [Payments made for giving up rights will have CGT implications.]
Compensation for injury
- contrast again is between loss of right or capacity to earn income [capital] or a substitute for income [revenue] [‘unliquidated damages’ - see ATL 6-880]. Thus payments for personal injury are capital; payments for loss of wages are income. [Payments for personal damages are excluded from CGT so if the amount is not income, it is not taxable.]
#3: A [mere] gift is not income
This proposition is grounded in Hayes v FCT
(1956): a voluntary payment from A to B prima facie
is not income; but that presumption will not apply when the payment is in substance a product of services provided:
A voluntary payment of money or transfer of property by A to B is prima facie not income in B’s hands. If nothing more appears than that A gave to B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a ‘gift’ in that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is in substance and in reality, not a mere
gift but the product of an income earning activity on the part of B, and therefore to be regarded as income from B’s personal exertion
While I would not say that the motive of the donor in making the payment or transfer is, in cases of this type, irrelevant, motive, as such will seldom, if ever, in my opinion be a decisive consideration. In many cases, perhaps in most, a mixture of motives will be discernible
So, a payment from John to Betty is not ordinary income but if John and Betty are employer/employee or if there is a contract for the supply of goods or services between John and Betty, that presumption is likely to be displaced.
- What about former employees? [Dixon’s
- What about gratuitous payments? [Scott’s
- What does Kelly’s
case imply in regard to sportsmen’s and women’s testimonials?
(Some old UK authorities [Seymour v Reed
(1927)] suggest the proceeds of a benefit match should be characterised as personal tributes.
case & Stone’s
case suggest prizes won by professional sportspersons are likely to be income [ATL 4-046]
Nevertheless, employers may make gifts to employees and this is recognised by the exemption from Fringe Benefits Tax of (minor & infrequent) benefits and supported by Scott’s
case. Whilst the donor’s motive may be a consideration, the objective test is the character of the payment in the hands of the recipient
# 4: Windfalls are not income
In a revenue law context, income arises from some purposeful commercial activity.
Windfall gains are the product of luck and usually lack that commercial dimension.
• Punting: Martin’s
case, a ‘keen punter’ not carrying on a business as might be the case with an owner/breeder of racing stock and would be for a bookmaker. So, a successful punter is not assessable on winnings - Evans
- an unsuccessful punter is not entitled to a deduction - Brajkovich.
The weight of Australian authority is against a conclusion that punting and gambling gains are income. But:
• horse racing may amount to a business activity;
• prizes: may be income when they are incidental to commercial activity - Kelly’s
cases - but not when they are remote (eg: Pursuit of Excellence Awards) or random, such as lotto/bingo wins.
Quiz/TV contestants judged by reference to Proposition 10. So too hobbies.
#5: Mutual receipts are not income:
The essence of the ‘mutuality principle’ is that persons cannot profit through dealings with themselves. Mutuality implies a non-profit orgainsation in pursuit of a common objective generating funds from its members to be applied to the common cause. Funds generated externally (interest on deposits, dealings with the public etc) fall outside of mutuality principle.
Positive propositions - characteristics of income
# 6: To be income, an amount must be beneficially derived.
This proposition comes from Constable’s
case (1952). It concerned an employer’s contribution to a superannuation fund for the benefit of an employee:
- Employment Retirement
Employer contributes to a Superannuation fund pays
Superannuation fund retirement benefit
à not income beneficially derived à capital, not income
case is authority for the non-assessability of employers’ contributions to superannuations funds. The payments are not fringe benefits either. In the present context, Constable’s
case is also authority for saying that an amount that would have been income had the necessary derivation existed at some earlier period of time, does not become income at some later time when it is derived unless in the circumstances of the later derivation it has an income character. The employer’s contributions to the fund were not allowed, given or granted to the taxpayer. When the benefits were paid out at a later time, they were not income. An amount has to be characterised at the point of its derivation.
Income and derivation must co-exist [arguably, ‘unearned income’ is not income and it is not derived either]. An amount that is not earned is not income: eg, certain prepayments or lay-bys. However, the courts do not accept accounting revenue recognition criteria as conclusively determining when an amount is earned. Exactly when
income is derived is to be considered later.
# 7: Income is to be judged from the character it has in the hands of the recipient.
The decision in Just v FCT
(1949) provides an insight to this proposition: the Just brothers sold property for consideration that included a percentage of profits for 50 yrs from the redeveloped site. Normally, such a sale would be a ‘mere realisation’ in terms of the California Copper
principle. The HCA held the payments were income because the payments were for an indefinite amount and took the form of an annuity.
Colonial Mutual Life Assurance Co v FCT
(1953) acquired property from the Just boys and claimed a deduction [s51(1)] for the cost, describing it as ‘rent’. High Court classified payments as instalments of capital and not deductible.
Webb J said: “The fact that these payments to the Justs represented assessable income to them has, I think, no bearing on the question whether such outgoings are [deductions] within s51(1).”
The decisions in Hayes v FCT
(1956) 6 AITR 248 and Scott v FCT
(1966) 10 AITR 367 provide authority for Proposition 7. The donor’s motive may be a consideration but it is seldom decisive. The proposition is well illustrated by the Federal Court decision in Federal Coke Co Pty Ltd v FCT
(1977) 7 ATR 519.
# 8: Income generally exhibits recurrence, regularity and periodicity.
A number of periodic payments has an income character;
periodicity suggests an income character when other elements do not point to a different conclusion (eg; house-keeping allowance is periodical but not income)
regularity is the hallmark of wages, annuities pensions, workers’ compensation [Inkster’s
-- just because regularity is a common feature of income, do not conclude that an isolated or one-off receipt cannot be income: see Cooling’s
case. [Principle upheld by a majority of HCA in Montgomery
Isolated transactions may generate income when they are entered into with the intention of making a profit - Myer Emporium
(1987); California Copper
# 9: Amounts derived from employment or the provision of services are income.
An employment/service nexus generally stamps a receipt as income:
employment/service emp/service emp/service emp/service
sole reason important one reason unrelated
Questions are i) does the dividing line lie to the left or right of C?
ii) where, in relation to that line, is the particular issue?
A Statutory Extension
• ITAA36 s26(e) [ITAA97 s15-2]: assessable income includes the value to the taxpayer
of benefits, bonuses, allowances (etc) relating directly or indirectly to employment or provision of services...
The old view was that this provision captured only what was already income by ordinary concepts other than its non-convertibility to money [hence ‘value to the taxpayer’ - Scott’s
case] but in Smith’s
case (1987) Brennan J considered the provision captured capital amounts too. The decision in Smith
was wrongly decided: although a ‘mere’ gift is not ordinary income, a connection with employment or services will make it statutory income assessable under s26e/15-2. The application of s26(e)/15-2 has been largely overtaken by Fringe Benefits Tax.
Refer to Rowe’s
case (1997). A majority of the HCA held that an ex gratia payment to a former employee was not incidental to employment [ATL 3-400]
# 10: Amounts derived from carrying on a business are income.
• Is there a business? See Ferguson’s
~ has it commenced? Is it ‘too soon’ yet to say a business has started (and so the set-up costs are structure related and capital in nature)? [Softwood Pulp & Paper
~ is the undertaking ‘commercially viable’? This is the principal test since the prospect of profit is the stamp of business and what separates businesses from charities of hobbies. Other considerations expressed in Ferguson
tend to qualify the relevance of profit.
[In regard to a hobby, it could be said that the activity does not have a profit intention, even if it generates a surplus.]
• What is
~ an exact identification of the business is critical because that will assist in characterising process [revenue] related gains from structural [capital] related gains. For example, the sale of shares [trading stock] by a share dealer
are on revenue account whereas the sale of shares [assets] by an investment
company are likely to be on capital account. Refer to London Australian Investment Co
for an illustration of the difficulties of these distinctions.
• Isolated transactions See Myer Emporium [California Copper].
~ Isolated or unusual transactions involving the sale of capital assets [structure] may yet produce revenue amounts when entered into with the intention of making profit
· ordinary business transactions generate income by ordinary concepts because the nature of business is profit making;
· but, not all business profits are income; that would destroy the destroy the income/capital distinction;
· to produce income, transactions must be commercial and be entered into with the intention of making a profit.
Taxpayer was a naval officer who intended upon his retirement to buy a property and breed cattle. Several years before retirement he entered an agreement to lease five cows with the intention of keeping the heifers and building up a herd. He claimed associated deductions on the basis he was carrying on a business.
the Federal Court held the taxpayer was carrying on a business. The size of the activities was a factor, but not decisive. What was important was that the activities were commercial in nature and regular and recurrent.
‘There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular year does not appear to be essential. Certainly it may be held a person is carrying on a business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that the additional activities constitute the carrying on of a business. The volume of the operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.’
# 11: Amounts derived from property are income.
Property yields rent, interest, dividends and royalties.
• Interest is not defined in the Act. Its ordinary meaning is the amount generated from the use or employment by others of a capital amount. Interest is inherently on revenue account: Steele’s
• Rent is not defined but at common law it means a payment received by a lessor in return for the use by a lessee of real or personal property: Yanchep Sun City Pty Ltd v C of State Taxation (WA)
(1984) 15 ATR 1165.
• An annuity is a series of payments made under a contractual obligation for a specified number of years or for life; Edgerton-Warburton v FCT
(1934) 3 ATD 40.
• A royalty is an amount paid to the owner of property for the right to use the property or to remove a substance; Stanton v FCT
(1955) 92 CLR 630; 6 AITR 216.
• Dividends paid to a shareholder out of profits derived by a company also sit comfortably with Proposition 11 and such payments would normally be income by ordinary concepts. [But dividends paid in the form of bonus shares could be seen as capital.] A separate code comprising ITAA36 s 44 - 47 covers the taxation of dividends [meaning dividends are made statutory
income and s6-25 applies (Remember?)].
#12: Amounts received as substitutes for or compensation for lost income are themselves income.
In Proposition 2 it was established that capital does not have the character of income and that a payment made for the loss of a right
to earn income was a capital payment. Thus, in the case of a business, payments made for the loss or sterilisation of profit making structure is capital and for an individual, payments for the loss of a right or capacity to earn income are capital receipts. Proposition 12 makes a different assertion. It states that payments in substitution of income are themselves income. The second ground in FCT v Myer Emporium
is authority for saying compensation for the loss or assignment of future income is itself income. As a result, social security payments such as unemployment benefits would be income under Proposition 12. So too would be payments made to an employee on sick leave or in receipt of workers’ compensation. In Tinkler v FCT
79 ATC 4641, as the result of a motor accident the taxpayer was unable to work and was entitled under the Motor Accidents Act
to payments for the loss of income calculated as a proportion of average earnings. The taxpayer argued that the payments were for the loss of earning capacity - a capital asset. The Full Federal Court held the payments were a substitute for income. The principle in Tinkler’s
case, as in other compensation cases, was stated by Brennan J as follows (at 4643):
Where a taxpayer gives up his income in exchange for other payments, the other payments take on the character of income for which they were exchanged (C of T (Vic) v Phillips
(1936 55 CLR 144 at 157). And where payments are made pursuant to a statute as compensation for an asset acquired by the State or sterilised in the hands of the taxpayer in order to serve the public interest, those payments take their character from the character, in the taxpayer’s hands, of the asset acquired or sterilised (see, for example, Newcastle Breweries Ltd v IRC … Commr of Taxation v Wade
(1951) 84 CLR 105 …).
Thus in Allman v FCT
98 ATC 2142 a payment made for income lost through wrongful dismissal was assessable income because it was a substitute for income that would have been earned.
Compensation paid for the cancellation of business contracts or agreements (when the profit- making structure is left intact) will be a substitute for income: Heavy Minerals Pty Ltd v FCT
(1966) 115 CLR 512; 10 AITR 140. If the profit-making structure is permanently impaired, the compensation will be capital: Van den Bergs Ltd v Clark (Inspector of Taxes)
 AC 431; Glenboig Union Fireclay & Co Ltd v IRC
(1922) 12 TC 427. Where the cancellation results in termination of the taxpayer’s business, the payment will be capital (California Copper Products Ltd (in liq) v FCT
(1934) 52 CLR 28) but where a cancelled agency or supply contract in one of many or is a comparatively minor component of the taxpayer’s wider business, the general proposition holds; the compensation is a substitute for income: Kensall Parsons & Co v IRC
(1938) 12 TC 608.
~ Statutory income comprises:
i) Rewritten provisions in ITAA97 [s15 & s 20 ITAA97]
ii) Remaining provisions of ITAA36 s26; dividends [s44 -47 & ITAA97 Div 207]
iii) Also includes capital gains tax [considered later].
iv) Employment Termination Payments [ETPs: ITAA97 s80 – 83] and Superannuation payments [ITAA97 Div 280+]
The ITAA97 framework
[s15 & s20]
Statutory income under ITAA36 was found in s26. Much has now been rewritten; some is found in Divs15 & 20 ITAA97. Many items are probably also income by ordinary concepts and s6-25 prevents double taxation and directs that rules relating to statutory income prevail over ordinary income.
1. Div 15: Some items of assessable income
Div 15 comprises a number of operative provisions that include in assessable income some specific items, some of which would be income according to ordinary concepts. With one exception (s15-15 ), amounts are derived when received.
The main provisions are:
15-2 Employment allowances/benefits [formerly ITAA36 s 26(e)
15-3 Return to work payments [formerly ITAA36 s 26(eb)]
15-5 Accrued leave transfer payments [formerly ITAA36 s 26(ec)]
15-10 Bounties and subsidies [formerly ITAA36 s 26(g)]
15-15 Profit making undertakings [formerly ITAA36 s 26(a)/s25A]
15-20 Royalties [formerly ITAA36 s 26(f)]
15-25 Receipts for lease repair obligations [formerly ITAA36 s 26(l)]
15-30 Insurance indemnity for income loss[formerly ITAA36 s 26(j)]
15-35 Interest on overpayments of tax [formerly ITAA36 s 26(jb)]
15-70 Reimbursed car travel [formerly ITAA36 s 26(eaa)
With the exception of ss15-2, 15-15, 15-20 and 15-70, these provisions are self explanatory. Sections 15-2 and 15-15 (and their predecessors) have fascinating histories leading to the introduction of fringe benefits tax [FBT – s26(e)] and capital gains tax [CGT – s26(a)] but now have only residual application. Section 15-70 assesses a specific employment allowance (reimbursement for use of an employee’s car). Section 15-20 requires some comment:
15-20 Your assessable income includes an amount that you receive as or by way of royalty within the ordinary meaning of ‘royalty’ (disregarding the definition of royalty in subsection 995-1) if the amount is not assessable as ordinary income under s 6-5.
s15-20 seems to be saying that some royalties may be income according to ordinary concepts, assessable under s6-5. That would not include capital payments. Payments being royalties by ordinary concepts are assessable under s15-20, disregarding the definition in s995-1. Such amounts could include capital. Royalties under s995-1 derived by a non-resident are subject to withholding tax
The assessment process may be illustrated diagrammatically:
|----> Income s 6-5
Ordinary royalty ------ |
|----> Capital s 15-20
|----> Income s 6-5
‘Extended’ royalty --- |
|----> Capital Not assessable
as income – maybe CGT
2. Div 20: Amounts included to reverse the effect of past deductions
[ATH 4 180]
Div 20 is directed to recouping amounts that were formerly deductible. The division operates independently in that there is no underlying principle of revenue law that the recovery of an amount that was previously deductible is, ipso facto,
of a revenue nature. There is no necessary symmetry between assessability and deductibility: FCT v Rowe
(1997) 187 CLR 266; 97 ATC 4317. Whilst a substitute for income is itself income (FCT v Myer Emporium
(1987) 163 CLR 199; 87 ATC 4363), compensation for lost income is also income (Heavy Minerals Pty Ltd v FCT
(1966) 115 CLR 512; 10 AITR 140) and amounts arising in the course of business are income (such as the refund in H R Sinclair & Sons Pty Ltd v FCT
(1966) 114 CLR 537), the High Court in Rowe’s
case unanimously refused to accept that there was a more universal principle of law.
Nevertheless, in the ITAA36 there were more than twenty specific provisions that assessed recoupments, repayments or recoveries of previously allowable deductions. Div 20-A brings these provisions together and provides a uniform treatment of the items. It might be noted that in Rowe,
one of the reasons for rejecting a general principle of symmetry between income and deductibility was that there were so many specific recoupment arrangements in the 1936 Act. This implied the absence of the principle.
For Div 20-A to apply there must be an assessable recoupment（赔偿）.
(a) any type of recoupment, reimbursement, refund, insurance, indemnity(赔偿金) or recovery of a loss or outgoing, however described; and
(b) a grant in respect of a loss or outgoing.
The loss or outgoing refers to any amount deductible under the Acts of 1936 or 1997.
The recoupments are made assessable under s 20-20:
20-20(2) An amount you receive as recoupment of a loss or outgoing is an assessable recoupment if:
(a) you receive the amount by way of insurance or indemnity; and
(b) you can deduct an amount for the loss or outgoing for the current year, or
you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.
20-20(3) An amount you receive as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:
(a) you can deduct an amount for the loss or outgoing for the current year; or
(b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year;
under a provision listed in section 20-30.
Therefore, an amount may be recouped under one of two mechanisms:
an amount is received by way of insurance or indemnity that has or will be deductible;
an amount is received that is deductible or was deductible under a provision listed in s 20-30.
Section 20-30 lists the following provisions of ITAA97 (as well as their predecessors in ITAA36) including:- [refer ATH 4-180]
8-1 rates and taxes and bad debts
25-5 tax related expenses
25-35 bad debts
25-45 embezzlement and larceny by an employee
25-60 election expenses
25-75 rates and taxes
[plus recoupment of a range of capital write-offs, such as depreciation]
Sale of formerly leased motor vehicles [See ATH 6 140]
Assessable income includes the profit
up to the lesser of the deductible lease payments or the notional depreciation (being cost minus sale price).
Dr How leases a car for 3 yrs at $400 mth; used 60% for income producing purposes.
Cost of the car was $32,000. Agreed residual $20,000. How acquires the car at the agreed residual and sells it for $26,000. What is assessable under s20-110?
• profit: 26,000 - 20,000 = 6,000
• deductible amts 400 x 36 x 0.6 = 8,640
• notial dep’n 32,000 - 20,000 = 12,000
The lesser amount of $6,000 is assessable.
If sold for $30,000 [profit $10,000] then $8,640 is assessable
The ITAA36 s26 framework
[the remnants of s26]
• Employment Termination Payments
In the ‘good old days’ payments made upon termination of employment were assessable only on 5%. That meant 95% was tax free. Obviously it was in an employee’s interest to accumulate whatever bonuses and leave entitlements until resignation or retirement. In 1978 payments in lieu of annual leave and LSL were specifically made fully assessable (subject to a maximum tax rates). In 1983, all termination payments were made fully assessable. From 2007/08 Pt 2-40 and Pt 3-30 cover ‘retirement payments’ and superannuation. [See below]
• gains on the sale of ‘traditional securities’: s26BB
Under ordinary income concepts, capital receipts are not assessable and capital outlays are not deductible. In the case of an investor (not being a dealer) holding ‘traditional securities’ [being government bonds, debentures - but not shares], the sale proceeds would be capital under the California Copper
principle. The effect of s26BB is to include in statutory income a gain arising on the redemption (or sale) of a security at a premium. Section 70B ITAA36 provides for a deduction for redemptions at a discount.
• Retirement payments [very brief overview only; not examinable]
· Payments upon retirement for entitlements to annual or long service leave are assessable under Subdiv 83-A and Subdiv 83-B.
· A genuine redundancy payment and an early retirement scheme each comprise a tax free amount and an amount assessable under s83-170. The tax free amount is 2007/08: $7,020 + $3,511 x yrs of service.
· Superannuation payments:
- payments upon death generally untaxed
- other payments from superannuation schemes depend upon whether they are ‘taxed’ or ‘untaxed’ and whether the recipient is over or under 55yrs or 60yrs. Concessional rates of tax apply.
So, there are three schemes in operation for the taxation of employees:
i) wages, salaries, supplements, bonuses etc are income by ordinary concepts, assessable under s6-5 ITAA97.
ii) Fringe benefits - where tax falls on the employer and benefits are ‘exempt’ income to employees - s23L [ITAA36].
iii) Retirement payments and superannuation are separately taxed.
BULAW 5916 TAXATION LAW & Practice
TOPIC TWO - TUTORIAL EXERCISES - INCOME (1)
This is the first tutorial for the topic Income. The objective of this tutorial is to practice problem solving skills; both through self-assessment of conceptual knowledge of the topic of Income and through tutorial discussion of the multiple choice questions set out below.
Please prepare answers to questions Qs 2, 11 & 14 in Australian Taxation Study Manual (Hint: consider whether in Q14 the two reimbursements are Fringe Benefits) and check your answers against those provided. In the tutorial we will discuss any difficulties raised by these problems.
2. Multiple Choice Questions
In relation to the liability to income tax, which of the following statements is most
A Income tax is levied only on ordinary income.
B The amount of income tax payable is calculated by multiplying the taxpayer’s taxable income by the applicable tax rates and adding any applicable tax offsets.
C The rates of income tax are determined by the Commissioner of Taxation
D Rates of tax vary depending on the nature of the taxpayer and whether the taxpayer is a resident or non-resident.
E Medicare levy applies to all taxpayers.
Which of the following statements is most
A An unsolicited gift motivated by goodwill arising out of a previous employment will always be ordinary income.
B Voluntary payments for one-off events are more likely to be assessable than regular payments relied on by the taxpayer.
C A payment by an employer to an employee who was overseas visiting a sick relative is assessable income. (The payment was to compensate the employee for lost wages.)
D A tip received by a waiter in a restaurant will not be income because it was not paid by the employer.
E A cash award received by a sportsperson from a television company that is not their employer will never be assessable income.
Which of the following statements is most
A Exempt income and non-assessable, non-exempt income are included in assessable income
B Assessable income includes ordinary income and statutory income
C Assessable income always includes the recoupment of deductible expenditure
D A fringe benefit provided to an employee will be statutory income
E Exempt income includes non-taxable amounts
Which of the following is not
a factor to consider in determining whether an amount is ordinary income in the hands of the recipient?
A The quality or character of the payment from the perspective of the payer.
B The payment is received regularly by the recipient.
C The motive of the payer in making the payment.
D The receipt is a product of employment.
E The payment is made in the form of a lump sum.
Which of the following views forms the basis of the judicial concept of income?
C Commercial principles
D Ordinary concepts
E Economics and Accounting
. Discussion questions. Are the amounts income?
i) Martha is George’s solicitor and they both reside in Sycamore St. As part of a road widening plan the local council wishes to demolish three houses, including George’s. The home-owners engage Martha to oppose the scheme. Martha is also president of the Sycamore rate payers’ association and organises petitions and protests. The council abandons its plan. George gives Martha $10,000 in appreciation of her efforts.
ii) [Ripping Yarns
] Richard Head is an English sailor attempting to be the first ambidextrous freemason to circumnavigate the world backwards. In the Southern Ocean, south of Western Australia he collides with a left-handed pygmy attempting a similar feat whilst blindfolded and tied upside-down to the mast. Richard is rescued by HMAS Preposterous.
Channel 5 Perth pays Richard $200,000 - half payable in 2008/09 and the balance one year later - for a series of exclusive appearances on its Late Nite Show.
iii) [True stories
] The oil tanker Kirki
foundered off the coast of Western Australia and the tug Lady Kathleen
was sent to assist. It arrived to find the evacuated Kirki
drifting towards the coast threatening risk of substantial damage to the environment together with loss of cargo and the ship itself. In an act of considerable bravery, a tow line was connected and the vessel and cargo saved. A share of the salvage reward was divided amongst the crew of Lady Kathleen.
iv) Somethings to think about….
(a) Suppose Farmer Brown has carried on the business of primary production [see definition in ITAA97 s995-1] for many years. In 2015 he is approached by the management of Wind Wizards Pty Ltd, a company setting up wind towers for the production of electricity. He is offered $21,000pa for 15 years in consideration for the grant of a right to build three wind turbines on his property. The payment includes the right to enter Brown’s land to make periodic inspections and carry out repairs and maintenance.
Farmer Brown has not previously entered into a similar transaction or, indeed, any transaction outside of his farming operations.
Is the payment ordinary income?
Is it a windfall gain?
Is some or (possibly) all of it capital?
Is it simply rent?
If it is income, is it income from personal exertion or income from property?
(b) Former Exam Question
Farmer Brown is a primary producer producing wheat and wool. He has not previously derived income from sources other than primary production. In March 2014 he was approached by Sunshine Festivals Pty Ltd, a company conducting music festivals with a proposition to lease 100ha of his property for a period of four weeks in November 2014. The company undertakes to remove all equipment at the conclusion of the festival and restore the landscape to its original condition, at their cost. An agreement is reached to pay Farmer Brown $5,000 in April 2014 to secure the deal and another $5,000 at the conclusion of the 2014 festival.
Advise Farmer Brown whether some or all of the payments are assessable income in 2013/14.
Federation University – Business School
BULAW 5916 TAXATION LAW & PRACTICE
LECTURE GUIDE 3
WEEK 3 (4) Derivation & Jurisdictional Issues
DERIVATION, SOURCE, RESIDENCY & EXEMPT INCOME
Ref: Gilders et al, Understanding Taxation Law
Ch 2: paras 2.21 – 2.49; Ch 4.
Woellner et al, Australian Taxation Law
Ch 9; Ch 13 [except 13-500 – 13-545] Ch 24: paras 24-000 – 24-170.
Refer to the central assessing provision:
s6-5(2) If you are an Australian resident, your assessable income includes the *ordinary income you derived
directly or indirectly from all sources....
s6-10(4) If you are an Australian resident
, your assessable income includes your statutory income from all sources...
Sections 6-5(3) and 6-10(5) assess non-residents
on income having an Australian source.
Section 6-15(2) states that exempt income
is not assessable income.
Section 6-5 sets up the jurisdictional limitations of Australia’s claims to income tax:
are assessed on income derived from all sources;
are assessed only on income having an Australian source.
The meanings of derived
(partly defined), source
are to be gleaned from case law relating to the former s25(1) ITAA36. Exempt income
is a kind of statutory non-income.
You should read
s6. It deals with assessable income, ordinary income, statutory income and exempt income
Look at s6-5(2) and s6-10(4) [above]:
is ordinary income included in your assessable income? [When it’s derived
is statutory income included in your assessable income and why might the timing of its assessment be different (if it is) from ordinary income? [Not clear – need to read the particular sections. Eg: in Div 15, most items are assessed when received.
Ordinary income is assessable when derived
. Derivation of income is about earning
. The rules are a mixture of legal principles (taken from case law), accounting & commercial practice and administrative convenience. The ITAAs also contain deeming
provisions that establish when an amount is assessable, even if by general rules it has not been received or accrued or derived.
· Court accepts the cash
basis of returning for tax but its understanding of the accrual method does not always correspond to accounting principles. In general, in the case of an accrual base taxpayer, the courts regard the existence of a legally enforceable debt
to be the point of derivation. But – ‘income derived’ is not necessarily ‘income receivable’.
· Which method is used depends upon its appropriateness to the taxpayer’s activities and the type of income earned.
1. Case law
: Carden (& Firstenberg & Dunn), Henderson, Arthur Murray, J Rowe & Sons: Whitfords Beach (or Cyclone Scaffolding or Memorex).
case – a taxpayer will use the method calculated to give an ‘appropriately correct reflex of true income.’
Income? Carden’s Estate’s
Medical practitioner ---------------------->Death <-------------------->
Accts Receivable Payment
Issue: was the income represented by the ‘accounts receivable’ derived by Dr Carden [accrual basis] or his estate [cash basis]?
[ie: if Dr Carden is on a cash basis, accounts receivable at date of death would not have been assessed and when payment received, it would be derived by his estate. If on an accrual basis, the accounts receivable would have been assessed to Dr Carden and become corpus (capital) of his estate.]
Held: a sole practitioner derives amounts that are essentially rewards for personal effort
when they are received
.[So, wages from employment derived when received.]
:- [Dixon J.]
i)Where no inventory, (ii) no natural connection between debtors &
creditors (or income and wages paid), (iii) no fund of circulating capital and (iv) but rather where payment is largely a reward for services, then –
à cash basis is appropriate
[So, sole practitioners and small practices providing personal services will generally return on a cash basis. It was accepted that most manufacturing concerns and trading operations would use an accrual basis.]
case - held that for a large firm of accountants, accrual basis was appropriate even though (i) [above] was not a feature of a firm of professionals. The scale of operations, the firm’s accounting system, the way the business was practiced all contrasted with Carden.
, the change from cash to accruals meant that closing debtors in one year does not represent income derived because it is not received and following the change, in the year of receipt the debtors are not income derived because an accrual basis is now appropriate. The High Court refused to make a one-off adjustment (but note Dormer v FCT
(2002)15 ATR 353 [ATL 13-140]
- dance studio required advance payment for dancing classes. There was no contractual right to a refund. The company credited an account “Unearned Deposits” and recognised the amounts as income as the lessons were provided. FCT assessed the company on advance fees received. The court said:
‘ according to established accounting and commercial principles, in the case of a business selling goods or providing services, amounts received in advance...are not regarded as income
[Can an amount that is not earned be income by ordinary concepts anyway?]
There are two views of Arthur Murray:
~ one view emphasizes the significance of a refund: the amount is not derived because it may be refunded;
~ a second view highlights the matching of contractual obligations [a much wider ground]
[Spare a thought for taxpayer in Country Magazine.
it switched from cash to accrual so advance subscriptions were assessable in the year of receipt and were earned (and derived again) the next year!
~ Consider whether s6-25 would now prevent double taxation in C-M’s
with Australian Gas Light
case. When does Telstra (or Optus) derive (earn) revenue? [Unbilled fees might be accrued revenue, but they’re not ordinary income. In the AGL
case, demand could not be made for payment until the gas meter has been read and an account rendered à income is derived when an enforceable debt arises.]
Other [accounting] accrual methods have been rejected by the courts:
~ instalment sales [J Rowe & Sons;
ATL 13-310/20 ]
~ finance leases [AAS 17; ASRB 1008] [Citibank
For tax purposes, entities selling under these arrangements will derive income when an enforceable debt arises.
Consider the consequences of a change in the earning process:
Alpha Insurance Co is an insurance company providing coverage in return for prepaid premiums. For accounting and tax purposes it apportions the premium over its five year term on a straight line basis according to the Arthur Murray
principle. An actuarial review of the company’s exposure to risk recommended it change its method such that more premiums were treated as earned in the first two years and correspondingly lesser amount in later years:-
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Existing 100 100 100 100 100
Method 200 120 70 60 50
At the end of year 2 the company changed to the proposed method with the result that income of 120 relating to existing policies was not recognised.
In Commercial Union Australia Mortgage Co Ltd v FCT
96 ATC 4854 the court allowed the new recognition method for new
contracts but old contracts must run their course for tax purposes.
2. Statute law
(i) s6-5(4) and 6-10(3) deem
derivation upon constructive receipt (that is, the income is applied to your benefit). Arguably, not an assessing provision. It simply deems
an amount to be derived without the need for physical receipt.
(ii) s21 ITAA36: where in any transaction, consideration is paid in other than cash, the money value is deemed
to be given. For business transactions
, convertibility to money issue is removed by s21A. Under s23L, first $300 is exempt.
3. Summary of rules
For a taxpayer carrying on a business of supplying goods or services, income is derived upon the arising of an enforceable debt. This corresponds most closely to the accounting 'point-of-sale' or 'point-of-rendering-services' criteria of revenue recognition. Arguably, where this accounting treatment is appropriate, there is a good, argument for its applicability to taxation matters, but the accounting method does not dictate the taxation method. Debtors will not be assessable in circumstances illustrated by Firstenberg
or where the considerations outlined by Carden
are not present. Where payments are received in advance for the supply of goods or the provision of services, the Arthur Murray
principle will apply. [But it’s not clear that A-M
will apply to all
prepayments; maybe only to ‘supply of goods or provision of services’. It’s worth remembering too that decisions such as Dunn
were decided before accounting software packages such as MYOB became widely available.
Where the terms of a credit sale are ‘net 30 days’ the assessable amount will be the amount billed. Unbilled ‘work in progress’ is not a recoverable debt and so is not derived. ‘Contra’ amounts such as provisions for doubtful debts/sales returns & allowances etc are generally non-deductible. The gross amount is assessable. Bad debts are allowable deductions under ITAA97 s 23-35. The position with ‘sales returns and allowances’ was considered in Ballarat Brewing Co Ltd v FCT
(1951) 82 CLR 364; 5 AITR 151; 9 ATD 254:
Ballarat Brewing Co Ltd v FCT
Facts: The taxpayer brewery sold to customers on terms that provided a ‘prompt payment’ discount as well as a rebate for complying with certain conditions. Rarely were the rebates not given and the amount of the discount denied was insignificant. The company credited its revenue account with ‘net sales’. The Commissioner assessed the taxpayer on gross sales and argued the discounts should be brought to account only when they were allowed; ie, at the time of payment.
Held: In the High Court, Fullagar J upheld the taxpayer’s appeal. After reviewing the principle in Carden’s
case, his Honour said (at AITR 155):
What I have said provides, in my opinion, the only proper approach to the question in the present case. And, when the question is so approached, the answer seems to me to be plain. Which figure - the Commissioner’s or the company’s - represents or more nearly represents, the truth and reality of the situation? The company’s figure brings into account what the company will, in the light of all past experience and policy, almost certainly receive in respect of book debts - no more and no less. The Commissioner’s figure brings into account sums which the company will certainly, or almost certainly, not receive in respect of book debts. A trading account and profit and loss account based on the latter figure would be misleading, and there is nothing in the Act which requires the assessment of income on the basis of accounts which would be misleading in this respect.
In Ruling TR 96/20 the Commissioner states that the full invoice price for a credit sale is assessable unless the transaction offers a prompt payment discount in circumstances on ‘all fours’ with Ballarat Brewing Co Ltd
. This strict interpretation obscures the important point in Fullagar J’s judgment: ‘Which figure - the Commissioner’s or the company’s - represents or more nearly represents, the truth and reality of the situation?’ If there are circumstances where the taking of net profit into account as assessable income is appropriate, it would be surprising that in some situations, net sales was not the appropriate assessable amount. The ruling is silent about rebates.
• Professional fees
Fees for services are derived when they give rise to recoverable amounts where the taxpayer is carrying on a business (Henderson
), if paid in advance, when they are ‘earned’ (Arthur Murray
) but if the amounts are essentially reward for personal services, the fees are derived when received (Carden, Firstenberg, Dunn
that members of a partnership will derive their share on an annual basis when the partnership accounts are closed and profit is determined and appropriated. That is, although the partnership may return on an accrual basis, the partners will derive a share of that income upon its allocation, not on some progressive basis.
• Property rent
Property rent (as distinct from chattel leasing) is derived when it is received
. It follows that (as with other property income) rent in arrears is not derived. It might be possible to demonstrate that extensive rental activity amounts to a business and that an accrual basis is appropriate. However, it is difficult to see how the Arthur Murray
principle can apply to income appropriately returned on a cash basis. The A/M
principle may be seen as a refinement of the accrual basis and if the accrual basis does not apply, it would seem that the Arthur Murray
principle would not apply either. Otherwise it becomes necessary to imagine there are three methods of deriving income: cash, accrual and the A/M
principle. It can also be contended that A/M
is not concerned with derivation issues at all but rather with the underlying question of ‘what is income?’ In addition, it may be argued that prepaid rent cannot be deferred on the Arthur Murray
principle because the benefit - a leasehold right - is distinguishable from a series of discrete, if homogenous services such as dance lessons or newspaper subscriptions. There are conflicting decisions by the Tribunals.
• Chattel leasing
On the other hand, chattel leasing is to be contrasted with passive derivation of income from property. The hiring out of plant or equipment is clearly the carrying on of business and so an accrual basis applies.
Under the Arthur Murray
principle, prepayments for goods or services are derived when that service to which they relate is provided or, if no service is required, (say, in respect of a retainer or maintenance agreement) when the service would have been provided, the time period has elapsed or there is no longer provision for a refund. As indicated in above, property rental relates to a right of occupancy, not a discrete supply of services.
Dividends are derived when paid
. ITAA36 s 44 assesses dividends ‘paid’ and ITAA36 s 6(1) defines ‘paid’ to include ‘credited or distributed’. In Brookton Co-operative Society Ltd v FCT
(1981) 11 ATR 880; 81 ATC 4346 Mason J said (at ATC 4355):
The reference to ‘dividends’ in s 44(1)(a) must be read as a reference to dividends the payment of which is enforceable because they have been declared so as to create a debt, or to dividends which are no longer revocable because, as between company and shareholder, they have been satisfied by payment. When s 44(1)(a) is so read, the purpose of the extended definition becomes clear - it is to guard against the possibility, perhaps remote, that the word ‘paid’ might be so narrowly construed that dividends credited or distributed to shareholders in circumstances where they can no longer be revoked or rescinded by the company could not constitute assessable income in the hands of the shareholders.
• Wages and salaries (including directors fees, commissions, bonuses etc
Payments of this nature are derived when received; Brent v FCT
(1971) 125 CLR 418; 2 ATR 563. This includes back-pay and advances. For example, holiday pay paid in advance is derived when received and arrears in pay are not derived. Amounts paid directly into bank accounts are derived at that point; actual physical receipt is unnecessary. Attempts to defer derivation by non-banking of cheques etc will not be successful. The payment is ‘constructively received’.
Interest is also derived when received unless the lender is in the business of lending money - in which case an accrual basis applies. Interest credited to a bank account is ‘constructively received’.
Banks, finance companies and similar financial institutions that carry on business as financial intermediaries return on an accrual basis. Where a loan agreement provides that interest will be charged quarterly, it is derived on that basis but otherwise interest accrues on a daily basis.
Where a supplier of goods or services provides credit facilities, the interest will be derived on an accrual basis because the lending activity is seen as an integral feature of the taxpayer’s business. On the other hand, where a supplier invests in interest bearing securities unrelated to its business, it would seem a cash basis is appropriate. Similarly, interest charges on overdue accounts (as distinct from a credit facility) would be derived when received.
More difficult questions arise in relation to interest on doubtful loans made by lending institutions. There is New Zealand authority that interest is derived when it is debited to a borrower’s account; CIR(NZ) v National Bank of New Zealand
(1977) 7 ATR 282; 77 ATC 6001. However, it may be possible to demonstrate that likelihood of ultimate recovery determines derivation. At the end of the day, ‘the inquiry should be whether in the circumstances of the case [the method] is calculated to give a substantially correct reflex of the taxpayer's true income.’ Carden’s
Special rules are set out in ITAA36 Div 16E relating to deferred interest securities.
• Instalment sales
Instalment sales and profit-emerging basis methods of deferring recognition of the profit element until the instalments are received (or become due) are not accepted on the basis of J Rowe & Sons Pty Ltd.
As indicated above, trading income is derived at the point-of-sale or point-of-rendering-of-services.
• Specific profit assessment
The scheme of the Act is to assess income derived and offset deductions allowable. Generally, gross receipts will represent income. When the gross receipts do not possess an income character but a net amount does, the courts have been prepared to admit the net amount: ie profit
is assessed: Whitfords Beach.
Neither the choice of method nor changing the basis of returning is at the taxpayer's discretion. If the circumstances of income generation alter, it is open to argue that the previous method of returning assessable income no longer provides that substantially correct reflex of true profit. Where doubt arises then the courts will decide the matter. It will be clear too that to say that there is only correct basis of returning for a particular taxpayer is not quite correct. Apart from the fact that circumstances may change, a taxpayer may return business income on an accrual basis and interest or rent on a cash basis. It is closer to the mark to say that there is only one appropriate basis for returning a particular class of income.
Simplified Tax System [STS]
From 1 July 2001 to 30 June 2007 a STS could be adopted by qualifying small businesses. Many small business are still within the system. Initially it provided taxpayers could adopt a cash basis
in four specific areas:
- s6-5 ordinary income was assessable when received;
- s8-1 general expanses, s25-5 tax related expenses and s25-10 repairs were deductible when paid or when incurred
- a depreciation system operated on the pooling of assets and allowing an accelerated rate; amount s <$1000 are immediately deductible;
- trading stock on hand did not need to be taken into account where its change in value is not more than $5000 (ie, all purchases are deductible, even if unsold).
To qualify for the original STS, taxpayers needed to satisfy turnover limits. Post 2007/08, taxpayers adopt an ‘appropriate’ basis of returning. Small Business Entities
with annual turnovers not exceeding $2m may access
· simplified depreciation rules
· simplified trading stock rules
· rules for prepaid expenses
· accounting for GST on a cash basis
· certain CGT exemptions
· Note: taxpayers in the STS before 2007/08 may continue until they exit voluntarily or become ineligible.
The source of income is ‘a hard, practical matter of fact’: the question must be decided in accordance with the practical realities of the situation: Thorpe Nominees P/L v FCT
88 ATC 4886.
salary & wages
- generally where the work is done [Camm, French
but consider Mitchum’s
case where weighting was given to other factors
- where the work is done (or the sale made). If several production stages, source may be apportioned on ‘value added’ basis.
- generally where contract made but could be where funds used. . [Largely irrelevant because of withholding taxes: see s128B ITAA36]
[Note: interest on loans secured by mortgage on Australian property is deemed
to have an Australian source]
- source of the profit out of which dividend is paid. [Largely irrelevant because of withholding taxes: see s128B ITAA36]
- where the property right is registered [note withholding tax]
- where the fund is located
- where contract is negotiated
see s6(1) ITAA36; s995-1 ITAA97 definition:
a person who resides in Australia... and includes
a person whose domicile
is in Australia unless…permanent place of abode
is outside Australia; a person has been in Australia more than one half of the year unless usual place of abode outside Australia and does not intend to take up residence in Australia…..
There are four dimensions to the definition:-
• common law test centering on ordinary meaning of ‘reside’
• a domicile test [domicile of birth & domicile of choice]
• a 183 day test [subject to qualification of permanently reside]
• superannuation test [for Government personnel]
cases [UTL 2.37]
· Where does a person reside? [Common law test]
· Where does the person's family live? And does the person reside with his/her family?
· Where was the person physically present during the year of income?
· Does the person own a home in Australia?
· What is the person's nationality?
· Does the person plan to remain in Australia?
· If the person is temporarily overseas, is this absence of an indefinite duration?
· Where are the person's investments located?
· Where are the person's business interests, including directorships?
i) domicile: a home each person is required to have in order to attract legal rights and duties. Everybody has a domicile of birth or choice. The domicile test is qualified by whether the person has a permanent place of abode outside Australia. In this context, ‘permanent’ does not mean ‘everlasting’ - Applegate’s
ii) physically present test: 183+ days; again subject to qualification of intention to take up permanent residence.
iii) the third statutory test is designed to cover diplomatic staff and armed service personnel posted overseas. It is not relevant to this course.
incorporation a determinative test of residency, but also a resident if
carries on business in Aust and has [either]
central control & management in Aust
or controlled by s/holders resident in Aust]
6. Exempt income
: [ATL Ch 9; note main categories as discussed below.]
s6-15(2) If an amount is *exempt income, it is not assessable income.
s6-20 An amount of *ordinary income or *statutory income is exempt income
if it is made exempt from tax by a provision of this Act.
a) entities that are exempt: s11-5 à s50-5 to 50-45
b) certain income that is exempt: s11-15 à (largely) former s23 ITAA36 now in ITAA97 s 51, 52; ITAA36 s23L.
c) fringe benefits are ‘non-assessable income and non-exempt income’. Exempt fringe benefits are exempt income: s23L and it is convenient, but not accurate to describe fringe benefits simply as ‘exempt’.
a) exempt entities: in general, charitable, educational, religious organisations; trade unions and employer organisations, hospitals, public educational institutions, local government etc. [ATL 9-030 to 060
50-45: exemption for non-profi
t organisations conducted for the promotion of game or sport,
music, art, science or literature or community services.
~ what is a game or sport? - Terranora Lakes Country Club
b) Certain income:
(i) s23AF & AG
[s11-15]: provides an exemption from Australian tax for certain foreign earnings of defence, aid and charity workers working more that 91 days abroad.
(ii) Miscellaneous exemptions include maintenance payments to a spouse or former spouse; pay and allowances to part-time members of the Defence Force Reserves; a range of pensions (but not the age pension) [Subdiv 52-A], education allowances scholarships etc [s51-10] [UTL 2-20 – 2.30].
See list s11-55.
This is a convenient category of amounts that are not part of the scheme of income taxation. For example, GST collected by a supplier. It’s not assessable income but to declare it exempt income would trigger unwanted consequences because if an amount is exempt income, it is taken into account in calculating whether there is a tax loss that could be carried forward to a later tax year and be recouped. So, the amount is simply deemed to be not assessable income and not exempt income.
BULAW 5916 TAXATION LAW & PRACTICE
TOPIC TWO - TUTORIAL EXERCISES - INCOME (2) (Week 4)
This is the second tutorial for the topic Income (and related issues such as Derivation, Source, etc). The objective of this tutorial is to practice problem solving skills both through self-assessment of conceptual knowledge of the topic of Income and through tutorial discussion of the multiple choice questions set out below.
: it will not be possible to cover all the following questions in tutorials. You should work through the problems yourself and discuss any unresolved issues with your tutor.
1. Self assessment questions:
Please attempt Questions 1.10, 2.33 & 2.37, and check your answers in TQA.
Any difficulties will be addressed in the tutorial.
2. Multiple Choice Questions
i) Doctor How is a medical practitioner operating as a sole practitioner. Consider the following financial data:
Opening debtors 15,000
Closing debtors 20,000
Rent paid for premises 10,000
Assessable income is:
ii) Tick & Cross is a large national accounting firm providing audit services. In respect of each particular assignment it negotiates a fee and renders billings as work is performed as follows;
Audit fee 130,000
- billed 60,000
- unbilled 40,000
Incomplete 30,000 130,000
Assessable income is:
D Some other figure
iii) In terms of when income is derived, which of the following items is the odd one out?
A Property rent (for rental of a two bedroom unit)
B Interest on a term deposit (held by an individual)
C Holiday pay (for an employee)
D Interest earned by a bank
iv) In terms of when income is derived, which of the following items is the odd one out?
A Wages and salaries (to an employee)
B Holiday pay received in advance (by an employee)
C Rent received (on a rental property)
D Trading income (for a large manufacturer)
v) Which of the following statements is most
A The return from an annuity is capital in nature
B Rent is generally statutory income
C Royalties are taxed under the capital gains provisions
D Dividends are derived when they are paid
3. Corner Pharmacy is a chemist shop. It provides no credit sales but accepts major
credit cards. It sells items off the shelf and the proprietor fills prescriptions for cash
and for payments made under the Pharmaceutical Benefits Scheme [PBS]. Three
assistants are employed. The following financial data is provided:
Cash sales 300,000
Credit card sales 150,000
Credit card reimbursements 160,000
- opening balance 25,000
- closing balance 30,000
- billings 200,000
- receipts 195,000
- opening stock 150,000
- purchases 500,000
- closing stock 200,000
On the assumptions that the business uses an accrual basis and the cost of sales and other outlays are allowable deductions for tax purposes, calculate the pharmacy’s taxable income.
4. Bloggs is an accountant who practised as a sole proprietor until 28/2/14 at which time he joined the partnership Bloggs, Cloggs & Doggs, a large accounting firm with national affiliations. Financial information for the year ended 30 June 2014 is as follows:
A Bloggs – Public Accountant
Fees received 52,000
By 30/6/14, Accounts Receivable stand at $9,000] [ie, he has received
a further $2000.]
BCD – Chartered Accountants
Fees received 150,000
Unbilled Work in progress
Partners in BCD share profits and losses equally.
Calculate Bloggs’s taxable income for the year ended 30/6/14. [Hint: note Dormer’s
5. The Lotteries Commission conducts an instant lottery called ‘Set for Life’ under
which a winner who scratches three ‘set for life’ panels wins $50,000 each year
for 20 years. The first $50,000 is payable as soon as the winner is notified, and later amounts are payable on the first anniversary of the first payment. In the event of the death of the winner, the Commission may pay any outstanding amounts to the deceased’s estate.
Is the annual payment income? Give brief reasons for your decision.
6. 4. Consider whether the following would be ‘games or sports’ for the purposes of ITAA97 s 50-45:
- ballroom dancing
- bush walking
- bird watching
- synchronised swimming
- a naturalist club
7. (Something to think about….)
Suppose that, following the devastating 2009 bushfires, the Victorian Government resolved to make ex gratia
payments to volunteer fire-fighters who had had to take leave without pay to perform their voluntary duties. Would the amounts be assessable income? [You should consider those factors (and court cases) that point to the amounts being income and not being income, then weigh them up.]
8. Neighbours Felix and Oscar are retired and devote their spare time to gardening. Felix grows marrows that are the envy of the neighbourhood. Oscar’s rhubarb has won him many admirers. On a regular basis they exchange surplus stocks. Would ITAA97 s6-5, s15-2, ITAA36 s21 or s21A apply to the exchange?
9. Laurie’s Lotto and Col’s Cakes trade in the Forum Shopping Centre. At the conclusion of Saturday trading they exchange Lotto tickets for cakes. Would s6-5, s15-2, s21 or s21A apply? What would be the tax treatment of any winnings by Col?
10. Designa-Kitchens manufactures kitchen cupboards. During the course of Kitchen Expo 2010 it offered prizes of kitchen units to the value of $5,000 to the 5,000th visitor and the most successful consultant at its booth.
i) Would s 6-5 apply to either of the transactions?
ii) Would s15-2, s 21 or s 21A apply to the award to the consultant?
iii) Would there be any difference if the prize to the consultant was airline tickets?