CLAW 3201 CASES代写
CLAW 3201 CASES
Residence of 代写 means:
A person, other than a company, who resides in 代写 and includes a person:
Whose domicile is in 代写, unless the commissioner is satisfied that his permanent place of abode is outside 代写
Who has actually been in 代写, continuously or intermittently, during more than one-half of the year of income, unless the commissioner is satisfied that his usual place of abode is outside 代写 and he does not intend to take up residence in 代写
v Ordinary concept tests: ( reside test)
v Levene v IRC
: the tax payer left England on medical advice, but returned for about five months per year for medical treatment, to take part in religious ceremonies and to attend to his tax affairs. He had no fixed place of abode, either in England or abroad and lived in hotels. The taxpayer was held to be a resident of the UK until he took a lease on a flat in Monte Carlo
ü The location of a person’s family, business and social ties will provide evidence of residence
ü The purposes for going abroad were nothing more than temporary
he was a resident
v IRC v Lysaght
a taxpayer who spent considerable time abroad. In this case the taxpayer partially retired and moved from England to an inherited estate in Ireland. He sold his home in England but remained a non-executive director of the family company. He travelled to England for approximately one week per month, staying in hotels, to attend board meetings.
ü a person maybe a resident on ordinary concepts if physically present for less than half years, for the reason that his visiting to another place with frequency and regularity
ü a taxpayer living in one jurisdiction but visiting another with frequency and reqularity
he was a residence
ü Residence status is a question of fact and is one of the main criteria that determines an individual’s liability to 代写n income tax
ü The primary test for deciding the residency status of an individual is whether the individual resides in 代写 according to the ordinary meaning of the word “resides”
ü If an individual resides in 代写 according to the ordinary meaning of the word, the other tests in the definition do not require consideration
ü Definition: to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place
ü The ordinary meaning of the word “reside” is wide enough to encompass an individual who comes to 代写 permanently and an individual who is dwelling here for a considerable time
ü The quality and character of an individual’s behaviour
while in 代写 assist in determining whether the individual resides hereè
o Intention or purpose of presence
o Family and business/ employment ties
o Maintenance and location of assets; and
o Social and living arrangement
DOES THE PERSON EXIBIT BEHAVIOUR CONSISTENT WITH RESIDING IN 代写??? WHETHER THERE IS HABITAUAL BEHAVIOUR???
v Domicile test:
v FCT v Applegate:
the taxpayer was a solicitor in Sydney who had been sent by his employer to Vanuatu to open and operate a branch. The taxpayer gave up the lease on his flat and, leaving no assets in 代写, left Sydney with his wife in November 1971. A lease was obtained on a house and the taxpayer, who obtained residency status, was admitted to practice in Vanuatu. In June 1973 the taxpayer became ill and returned to Sydney for medical treatment. After returning to Vanuatu for a short period he came back to 代写 eventually. While on time frame was specified, it was intended to be substantial.
whether during his time in Vanuatu, the taxpayer had a permanent place of abode outside 代写.
ü Permanent means less than everlasting or lasting forever
ü Permanent should be contrasted with temporary or transitory
ü If an individual resides in 代写 according to the ordinary meaning of the word, the other tests in the definition do not require consideration (also in TR98/17)
he was not a 代写 resident
v FCT v Jenkins
the taxpayer was a bank employee, was transferred to Vanuatu for a fixed three-year period. Prior to leaving 代写 the taxpayer attempted to sell the family home but was unsuccessful. He maintained a bank account in 代写 but cancelled his health insurance policy. Due to the taxpayer’s inability to efficiently perform his duties, he was repatriated back to 代写 by his employer at the end of 18 months.
the taxpayer had a permanent place of abode outside 代写, thus he was not an 代写 resident
v IT2650: setting out various factors which will be taken into account in ascertaining whether a taxpayer has a permanent place of abode outside 代写.
Factors to be considered:
· The intended
and actual length
of the taxpayer’s stay in the overseas country
· Whether the taxpayer intended to stay in the overseas country only temporarily and then to move to another country or to return to 代写 at some definite point in time.
· Whether the taxpayer has established a home
· Whether any residence of place of abode exists in 代写 or has been abandoned
because of the overseas absence
· The duration
and continuity of the taxpayer’s presence in the overseas country; and
· The durability of association that the person has with a particular place in 代写 ie maintaining bank account in 代写, information government departments such as centerlink that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer’s children, family ties and so on.
A rule of thumb, a period of two years or longer will be considered a substantial period for the purpose of a taxpayer’s stay in another country.
v 183DAYS test: requires physical presence in 代写 for more than one-half of the year.
S6(1): a company is a resident of 代写 where it is incorporated in 代写, or, not being incorporated in 代写, where it carries on business in 代写 and has either its central management and control in 代写 or its voting power controlled by shareholders who are residents in 代写.
v Incorporation test
v Central management and control test: where the real control of the company is located
o Decisions on broad company policy
o Financing policy
o Business strategy made at directors meetings
v Koitaki Para Rubber Estates Ltd v FCT
the taxpayer company was incorporated in NSW, but had its office registered as a foreign company in Papua. It owned and worked rubber plantations in Papua which were managed by an officer of the company there, acting under a power of attorney. The board of directors resided in Sydney and always met there.
ü The central management and control test will not be satisfied when there is extensive operating freedom
ü Mere day-to –day control over the business operations of a company, where that control is subject to monitoring and supervision by a head office, does not amount to central management and control of the company
ü Residence of a company depends upon the existence within the country for which it is claimed of some part at least of the superior administration or control
of the company’s general affairs
ü If a company incorporated elsewhere is merely trading in 代写
and its central management and control is abroad
, it does not become a resident of 代写 unless its voting power is controlled by shareholders who are residents of 代写.
the company was exclusively a resident of 代写
v Malayan shipping Co Ltd v FCT
the taxpayer company was incorporated abroad. The whole of its shares, except two, were owned by Mr Sleigh, an 代写n resident. Sleigh was managing director and managing agent. The two remaining shares were held by Singapore residents who were nominees of Sleigh. The business of the company was to charter tankers and the preparation and execution of the relevant documents was undertaken by Sleigh in 代写. In the relevant years Sleigh exercised complete management and control over the business operations of the company.
ü If a business of the company carried
on in 代写 consists of or includes its central management and control
, then the company is carrying on business in 代写 and its central management and control is in 代写.
ü Where is the ESSENCE of the business? The CM&C of the company will be the location of the actual decision making
, rather than the formal execution of the director’s resolutions.
the company was a resident
For a company to be a resident under the second statutory test two separate requirements must be met:
ü The company must carried on business in 代写
ü The company’s central management and control (CM&C) must be located in 代写.
For income from personal exertion, major factors include:
Sale of goods (trading stock)
The place where the contract entered into
Where the performance occurs
Where the payment is made
è the place where the trading activities take place
Sale of property other than trading stock
è real property: location of the property
Other property: various factors needed to be consider
è generally the place of performance of the services, alternatively, the place of the contract
è place where the contract is made or the money is advanced
è the location of the profits out of which the dividend is paid
è outgoing royalty: s6C deems the royalty to be sourced in 代写
Otherwise: the location of the industrial or intellectual property from which the royalty flows
Source of personal exertion income
v CT(NSW) v Cam & Sons Ltd
Men were employed in NSW at dockside to work on trawlers. The average cruise occupied from nine to 25 days, most of this time being spent outside NSW waters. The men were paid when the ship returned to NSW. The source was apportioned so that some of the men’s income was derived in NSW and some was derived outside NSW, according to the working time spent in and out of the jurisdiction.
ü “getting the job, doing it and getting paid for it”
ü Where the criterion of liability to tax is derivation from a source in the state, and income is derived from a multiple source, it must be apportioned
, and only so much of it as is attributable to the source within the state is liable to be taxed
ü Should decide what is the most important factors (contract, performance, payment) in the context, then that is the sourceè in this case, performance was the source.
the source was part of NSW
v FCT v Mitchum
the taxpayer was a well-known US actor who entered into a contract with a Swiss company for the provision of services. The Swiss company in turn contracted with a UK subsidiary of a US film studio for the taxpayer to provide services for a movie filmed in 代写.
ü the source is where the contract entered into
ü it is not necessarily the source is where the service was performed
ü where service can be performed in any location
, the place of contract or place of payment maybe relevant ( the greater the skill requirement the less significant is the place of performance)
v Nathan v FCT:
Nathan’s case said that the legislature in using the word “source” meant, not a legal concept but something a practical man would regards as a hard matter of fact to be the real source of income.
v FCT v French:
Taxpayer was a resident in 代写 and went to NZ for a few months. He was sent by his company, and 代写n company, to do some engineering work in NZ. He was employed in 代写, his money was paid into a bank account in 代写. He was actually employed in 代写. He actually went to NZ and worked for 3 months.
The HC said the source of income was in NZ for those three months i.e. where the work was performed.
ü If the services are performed in more than one country, then the source of income is usually apportioned between two countries subject to a de minimus rule. The income in NZ was sourced in NZ.
v FCT v Efstathakis
the taxpayer was a Greek national who applied to work for the Greek ministry for foreign affairs before coming to 代写. She was informed in Greece that she would get the job on coming to 代写. She was appointed as an assistant typist in the Greek press and information service in Sydney by ministerial decision in Greece on 12 December 1969. She thereby became a permanent public servant of the Greek government, which required her to join the Greek government superannuation scheme and pay income tax in Greece. She was paid in Sydney
ü the general principle that the source of service income is the place of the performance of the services
must be considered in the context of the possibility of other factors being relevant
source of business income
v FCT v United Aircraft Corp
the taxpayer was an American resident company which manufactured aircraft engines and spare parts. It entered into an agreement, which was concluded in America, to license an 代写n company to use its plans to manufacture certain aircraft engines and spare parts. The taxpayer had no patent in 代写. The 代写n company paid royalties to the taxpayer. The plans were sent free on board from NY to 代写.
ü if a person has rights over property or in relation to property he may derive income from that property
ü income derive from property means, income deriving from the property of the person sought to be taxed as having derived the income.
ü A person who neither owns anything in a country nor does nor has done anything in that country cannot, in my opinion, derive income from the country
ü If the royalties are received for technical know-how and services supplied outside that country, under a contract made outside that country, the source of those royalties would generally be outside that country
ü The situs of the contract
for the use of Know-how will probably provide the source of income from such usage
THE ACTUAL APPLICATION OF THE RESULT IN THIS CASE WAS OVERTURNED
BY THE SUBSEQUENT ENACTMENT OF S6C ITAA1936 è
It is should be noted that ITAA36 s 6C deems all royalty income derived by a non-resident to have an 代写n source to the extent to which that the payment is an outgoing of an 代写n business.
v Cliffs International Inc v FCT
the taxpayer was a non-resident company incorporated in the US: it was involved in a joint venture project for mining in 代写. In return for assigning the mining rights to its Cliffs co-ventures, the taxpayer was paid a royalty on iron ore produced and sold by the joint venture. The taxpayer entered an agreement with its co-venture whereby it received a commission on sales negotiated and concluded with overseas clients.
ü S6c ITAA1936: all royalty income derived by a non-resident to have an 代写n source
the royalty payments were conceded to have an 代写n source; the commission on the overseas sales agreements did not have an 代写n source
v Esquire Nominees Ltd v FCT
the taxpayer was a company incorporated in Norfolk Island and had its registered office and its central management and control located there. In the income year in question, the taxpayer, as trustee of a discretionary trust, received dividends paid on shares held in another Norfolk Island company. The dividends paid to the taxpayer were ultimately distributed after a flow of dividend through two other companies and which originated from the activities of a company resident in 代写.
ü the source of dividends cannot always be determined by the location of the share register
ü the source of dividend income is where the company paying the dividend made the profits
out of which the dividend is paid
the dividend was source outside 代写, in Norfolk Island
v spotless services Ltd v FCT
the taxpayer made a public floatation of shares and raised $40 million for which it had no immediate use. If it invested in 代写 it would be taxed at the corporate rate, but under s23 (q) of the ITAA1936 as it then stood, it would not be taxed if the source of the interest was offshore.
ü The source of interest income is generally the place where the obligation to pay the interest arose
. That is, where the loan contract
was made or the credit was given, or the place where the money is advanced
cook Island was the source
INCOME FROM PERSONAL SERVICES AND EMPLOYMENT
The general principle here is that a gain from a person’s labour, in employment or for personal services, is income under ordinary concepts. Incomes from personal services generally have the following indicia:
1. Payment is linked to the provision of employment or services;
2. The payment is often recurrent
3. Services are provided for the purposes of obtaining a gain.
The nature of those types of payments will be income under s6-5.
Two steps for court to decide:
Indentifying he activities undertaken
Determining whether the receipt is a reward for performing that particular activity
The main issue arise from income from employment or services are:
Is the payment sufficiently connected to the services so that it is income derived or is the connection so tenuous that the payment must be seen as a non-assessable gift?
Is the payment not convertible to cash?
Is the payment capital because it is not a reward for working, but is a reward for not working, eg a restrictive covenant or a compensation payment?
Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of , or for or in relation directly or indirectly to, any employment or services
rendered by you
Gift or income? (gifts and voluntary income)
- If payment is as a consequence of goodwill - it will not be assessable.
- If it is a result of the services - it is income.
A true gift is not assessable even if the gift was given as a result of the services; it is not given for the services. In the case of personal exertion, the income flows from the taxpayer’s ability to work and /or the employment contract. Personal gifts therefore fall outside thi concept of income because they arise from personal qualities.
A VOLUNTARY PAYMENT
THAT IS A REWARD FOR SERVICES WILL STILL CONSTITUTE ORDINARY INCOME
Ø Motive of donor
v Hayes v FCT
the taxpayer had formed a company, the management of which was taken over by Richardson. Richardson made several large gifts of shares in the public company, including 12,000 shares to the taxpayer. It was held that the taxpayer had been fully remunerated
for the work done while in Richardson’s direct employ and while employed by the companies controlled by him. The shares were a mere gift. The taxpayer was an accountant and financial adviser to Mr Richardson, and had worked for Richardson for a number of years. Richardson floated the company, made heaps, and gives the taxpayer some shares in the company. Shares can be sold. The Commissioner sought to include the value of the shares as the income of the employee.
ü A gift given for personal qualities is not regarded as ordinary income and would not normally be assessable to the recipient
ü If the recipient has already been remunerated for his or her services, that makes the volumetry income less likely to be ordinary income
ü The existence of a pre-existing personal relationship
will make the voluntary payment less likely to be ordinary income
v Scott v FCT
Taxpayer was a solicitor. He performed professional services for a widow, whose husband had been killed in the war. Scott assisted her in realising a block of land for a greatly enhanced value in his professional capacity. He had also assisted her in creating a monument for her husband (in Longueville Park). He had been paid fully for his professional services. At the end of it all he was given an unsolicited amount of £10,000 by the widow.
ü The receipt must be a product of the relevant activity to be ordinary income; if it is a product of friendship or other personal characteristics, then it is a gift
ü The motives
of the donor do not
whether the character of the receipt is ordinary income, although it might be one of the factors to consider in deciding whether the receipt is ordinary income
ü Whether a voluntary payment is ordinary income or not will depend on whether it has sufficient nexus to the service provided
ü An expected gifts is more likely to be ordinary income
ü If the donor intends the gifts to be reward for services, that makes the gift more likely to be ordinary income
Ø Gifts from employer
v Smith v FCT
the taxpayer was employed by Westpec Bank which had a continuing policy of encouraging staff to engage in further studies. Under this policy, payments were made to employees who successfully completed courses of study. In the 1982 tax year, the taxpayer received $570 from its employer on successful completion of a management certificate course at a technical college.
ü The payment seem to be assessable since there was no persona relationship and therefore the only cause of the payment was the employment relationship
ü S15-2 also applies to payments which were a product of employment relationship
it was income
v FCT v Dixon
the taxpayer’s employer had sent a circular to staff during World War II advising that it would endeavour to pay to staff who enlisted amounts to “make up the difference between their present rate of wages and the amounts they will receive from the naval or military authorities.” The taxpayer subsequently enlisted and received a series of such payments from his former employer.
ü A gift may be assessable income where it is truly caused by the employment relationship
ü Unexpected or voluntary payment may also be classified as ordinary income based on the nature of the payment, rather than any nexus with employment or services
ü It was income because the payments were periodical. The payments were substituted for or added to what was income and therefore took the character of income
ü They were periodical
receipts and the taxpayer depended on it
for his and his dependants’ maintenance
income under 6-5, not income under 15-2
v FCT v Holmes
the taxpayer voluntarily took part in a successful salvage operation which was outside the course of his employment. Under admiralty law he was only entitled to a reward if the salvage was successful. The AAT treated his reward as a classic windfall gain which was contingent on success.
ü if there is a real connection between the payment and service rendered, it would be ordinary income under s15-2 (service: salvage; payment received for salvage services)
ü mistake: the court should go to s6-5 first before looking at s15-2
S15-2 has the effect of rendering benefits in kind assessable despite their non-convertibility, provided that the benefits arise directly or indirectly as a result of a contract of employment or the provision of services.
v Payne v FCT
Janet Payne travelled regularly as a result of her employment with a large accounting firm. The flights were paid for by her employer as she was travelling for business purposes. On one of these trips Payne was offered a brochure which invited her to join the airline’s frequent flyer club. She duly completed the application form and paid the $95 membership fee. Over the next two years Payne accumulated sufficient points to purchase airline tickets for her parents to fly from England to 代写. The bulk of these points were accumulated through travel that was paid for by her employer, although a small percentage was from private travel.
ü Receipts that are not convertible to cash are not ordinary income
ü Two issues arises in relation to taxation from these loyalty programs:
o Whether the rewards are cash or convertible to cash
o Whether the benefit is connected with personal exertion
ü The benefit was not in connection with her employment
not assessable income
v FCT v Cook and sherden
a few taxpayers sold drinks ‘door to door’, these taxpayers received a free holiday from the soft drink manufacturer due to them selling a certain number of soft drinks. The holidays were not cash convertible and non-transferable
ü S15-2 did not apply because the distributors did not provide service to the manufacturer
ü Receipt was not cash convertible so they are not ordinary income (ordinary income should be cash convertible)
ü Receipt of non-cash-convertible holiday not ordinary income
v Tennant v Smith :
ü Receipt of free accommodation was not income as it as neither cash or cash convertible
ü Benefit must be convertible to cash to be assessable income
Reward for services or sale of capital asset
Capital receipts are not ordinary income under general principles
The distinction between a receipt that is a reward for services and a receipt that is capital in nature is primarily concerned with whether the taxpayer has given up a valuable right.
v Brent v FCT
Mrs Brent was the wife of the infamous criminal Ronald Biggs. Brent was arrested in Melbourne where she had been living with Biggs following his escape from a Uk gaol. After her arrest Brent was approached by a number of newspapers with offers to publish her life’s story, and she eventually signed an agreement with the daily telegraph. The agreement gave the UK newspaper exclusive rights to the publication of Brent’s story. It required her to be available for interviews by newspaper staff who would then write her story for publication. The taxpayer claimed the payments were not ordinary income but that she was being paid for giving up the capital rights to her story as she signed over the exclusive rights to the newspaper.
whether it is sale of property or rendering services
ü She was essentially paid for her services of telling her story and she did not give up or dispose of any property
ü Making herself available for interview, communicating information and in signing the manuscript which the journalist produced was not her property
ü There was no sale of an asset as the taxpayer was not an original owner of the copyright. The info supplied was not property
ü Information was capable of being a capital asset but only in the context of the taxpayer carrying on a business
Brent’s earnings were ordinary income.
A restrictive covenant or restraint of trade may be formed at the time of entering into contract, during the contract’s operation or after the completion of the services.
Receipts for entering a restrict covenant
Characterising receipts from entering a restrictive covenant as a capital or ordinary incomeè
o Whether the payment is connected with the current employment agreement
o Whether it is a separate agreement to give up valuable rights
v Higgs v Olivier
The famous actor Olivier was paid $15000 for agreeing to not appear in or direct any film for a period of 18 months after he appeared in the film ”Henry V”.
ü The money was received not as a result of his vocation as an actor
ü The agreement to pay the $15000 was separate to his contract to perform in the film and was made after the completion of the filmè not the payment for his performance as an actor but for giving up the right to earn in comeè capital nature
ü The restrictive covenant payment made as part of an ongoing contract
are more likely to be income
ü IS THE PAYMENT FOR THE COVENNANT A REWARD FOR SERVICES OR THE PRODUCT OF BUSINESS OPERATIONS
v DICKENSON V FCT
ü A payment made to compensate for the restriction of a person’s capacity to perform services or to carry on a business may be a capital payment.
ü A payment for ending a business is a capital nature
· Conclusion: capital nature
v FCT v Woite
the taxpayer was an 代写n Rules football player who was playing for an Adelaide club. On 19 November 1975 he received $1000 for signing an agreement which provided that should he ever play football in Victoria, it would be with the north Melbourne football club. The agreement did not prevent him from continuing to play in south 代写 .the taxpayer was never played football in Victoria
ü The court held that the payment was of a capital nature because the taxpayer deprived himself of the opportunity of playing for other Victorian clubs
ü The restrictive covenant payment made as part of an ongoing contract
are more likely to be income
: not ordinary income
v Reuter v FCT
the taxpayer was involved in the very famous takeover of John Fairfax ltd. As part of the arrangements in relation to the take over the taxpayer was paid $8 m to covenant that he would not without prior approval claim the success fee for the takeover against Bond Media.
ü the substance of the agreement, rather than its form, and held that the receipt of $8M was closely connected to the services provide by the taxpayer
ü reward for service
the 8M payment was ordinary income
INCOME FROM BUSINESS
Three areas that need to be determined are:
1. Are you carrying on a business
2. The precise nature and scope
of the business; (hobby or recreational pursuit are outside the scope of the business)
3. Establish the relationship
between the business and the receipt ie that the receipt is a product of or an incident of carrying on the business – then ordinary income.
If you satisfy all three what you get is income under ordinary concepts, and is included in your assessable income.
Factors to be considered by court:
System and organisation
Profit motive: Ferguson v FCT
Size or scale of activity : despite this factor, a business may be carried on in a small way: Thomas v FCT
Frequency of transactions: whilst frequency is one indication of business, a business venture can be confined to an isolated transaction: FCT v whitfords Beach Pty Ltd
Period of ownership: a quick resale of property tends to indicate a business activity: Turner v Lost
Nature of property: property that gives no inherent pride of ownership is more likely to have been acquired for business purpose: Rutledge v IRC
Supplementary work done on the property: FCT v whitfords Beach Pty Ltd
Circumstances responsible for the realisation: the taxpayer may be able to point to non-business reasons for selling. An asset may have been acquired for the purpose of using it as part of the capital structure in a business, and then been sold where the business venture has collapsed: West v Philips, Ferguson v FCT
A business can be carried on even if the activities are illegal: FCT v La Rosa
Indicators of business:
v Evans v FCT
· Facts: Taxpayer had credited his successful gambling as the explanation of his sudden increase in wealth during a Tax Office audit of his affairs. This was accepted by the Commissioner who then claimed that the proceeds of his gambling were assessable because Evans was carrying on a business.
ü Evans’ activities were merely a hobby. He has no system or organisation
if they are to be characterised as a business.
ü The applicant’s activities have the volume and extent sufficient to characterise him as being addicted to gambling
· Conclusion: the taxpayer’s activities did not amount to a business
v Ferguson v FCT
· Facts: Taxpayer was a naval officer who wished to engage in primary production activities upon his retirement. Whilst still in the navy, Ferguson leased five cows for four years to be pastured and bred by a management company.
ü Shows the practical steps necessary to meet the tests of carrying on a business.
ü Although it is small, still a business
ü A purpose of profit-making may be important but not essential
ü Repetition and regularity is a consideration, but a business could involve a single transaction
ü Organisation and a businesslike approach with appropriate record keeping etc is an indication of business activity
ü Having other sources of income did not preclude this activity from being a business
ü The size of the operation and the amount of capital are relevant, but must be looked at in the context of the type of activity
ü The court may place a relatively higher degree of importance on whether the taxpayer is taking a commercial approach, by conducting the activity in a manner similar to that used in situations that are clearly conducting a business
ü Establishment of a business for income tax purposes requires some degree of commerciality, which would be indicated by production being more than required for domestic consumption
and a more systematic and organised approach
to the vegetable and fruit production.
· Conclusion: the taxpayer was carrying on business
v Thomas v FCT
· Facts: the taxpayer was a barrister who purchased 7.5 acres of land where he constructed a private home and planted several varieties of tree for timber, macadamia nut and avocado production, some of which were irrigated. For the relevant period no income had been produced and some of the trees had been destroyed by fire and there had been some replanting. Thomas contended that he was carrying on a business, but the commissioner argued that this was a hobby because it was not likely that there would be any significant income and this type of agriculture was not common in this area.
ü A business exists even though it is conducted on a small scale and has little or no short-term prospect of making profit
ü The activity was more than a recreational pursuit or hobby
ü Mistakes were made and the taxpayer did seek technical advice to assist with management decision
ü Scale of tree planted was greater than his domestic needs
· Conclusion: there was a business of primary production
v FCT v Walker
· Facts: the taxpayer worked in a business located in north Queensland. In 1980 he purchased a single female Angora goat for $3000 for the purpose of breeding. The goat was located in Victoria some 2000 kilometres away from the taxpayer. The taxpayer paid a veterinary surgeon fees to look after the goat. He paid 2000 for stud services and incurred expenditure on insurance, interest, and stamp duty and bank charges. He expected to make a profit over six years of $6900, but the goat died after producing only two offspring, one of which died. The surviving offspring was used for breeding purposes and the venture was sold in 1983 incurring losses.
ü the taxpayer was conducting his activities in a “businesslike” way
ü The taxpayer was found to be in business even though the venture was not particularly successful and was of such a small scale
· Conclusion: business
v FCT v Stone
· Facts: the taxpayer was a world class javelin thrower and was also a full time employee in the Queensland Police force. As well as performing her duties as a police officer, stone competed successfully in national and international competitions, including being selected for the 代写n Olympic squad and winning the women’s javelin event in the 1998 world cup.
During the tax year ending 30 June 1999 stone earned $136448 from her sporting pursuits. This sum consisted of prize
money, grants from the Queensland sports academy, appearance fees
to promote athletic products. The taxpayer also employed a manager for a short time to manage her sponsorships and appearance.
ü One can carry on business although she was not motivated by profit.
ü Prizes for sporting achievement received by a sportsperson whose sporting activities constitute a business
will be ordinary income from that business
ü Courts may label for the facts that the taxpayers that compete in non-team sports at high levels of competitions especially if sportsperson also undertakes related commercial activities, such as seeking corporate sponsorship
ü She was employing her skill to earn income from her sport.
ü She enters into contracts to help her defray her costs and used her success to win prize monies and increase her eligibility to receive grant money.
· Conclusion: she was carrying a business
INDICATORS WHICH SUGGEST A BUSINESS IS BEING CARRIED ON:
A significant commercial activity
Purpose and intention of the taxpayer in engaging the activity
An intention to make a profit from the activity
The activity is or will be profitable
Repetition and regularity of activity
Activity is carried on in similar manner to that of ordinary trade
Activity organised and carried on in a businesslike manner and systematically
Size and skill of the activity
Not a hobby, recreation or sporting activity
A business plan exists
Commercial sales of product
Taxpayer has knowledge of skill
SCOPE OF THE BUSINESS: (nexus of receipt with business)
Once it has been decided that there is a business, it then becomes necessary to decide what is the scope of the business, since not all profits made by a business are assessable income.
è (Determine which part of the profit is assessable given there is a business)
S21A: non-cash business benefit
Before s21A applies, it is first necessary to determine if the benefit is ordinary income derived by carrying on the business, disregarding whether it is cash or convertible
Characterising a receipt as part of the normal proceeds of the business requires:
An investigation of the nature of the business
An assessment as to whether the receipt shows a nexus with the identified business activity
v Californian Copper Syndicate v Harris
· Facts: the taxpayer was incorporated for the purpose of mining
and it acquired certain mines. Instead of working them, the mines were sold at a profit
ü What was the taxpayer’s intention at the time of entry into the scheme?
ü The court was satisfied that the taxpayer intended at the time of acquisition to resell the mine at a profit rather than work the mine for trading receipts
ü To ascertain this intention the court will look to objective factors, such as the availability of capital to work the mine, and will also receive direct evidence as to the taxpayer’s subjective intention
ü If a receipt is not
earned from “carrying on” the usual business
of the taxpayer, then it is not within the “normal proceeds”
of the business, although it may still be assessable for other reasons
ü A “mere realisation” of a capital good made by enhancing its value- this vill result in capital gain
ü A gain made from carrying on business-this will generate ordinary income
· Conclusion: The profit was held to be assessable income.
v Western Goldmines(NL) v DCT(WA)
· Facts: the taxpayer acquired mines for the purpose of working them, but eventually sold the mines to another company.
ü Depend on the original purpose for the business
· Conclusion: not to be assessable income.
v Scottish 代写n mining Co Ltd v FCT
· Facts: the taxpayer was a mining company that purchased land between 1863 and 1865 for the purpose of mining coal
. Which it did until 1924. After 1924, the taxpayer began to sell the land in subdivisions in a large way. Expenditure was incurred in subdividing the land, in road building and in erecting a railway station. The taxpayer granted land to schools and churches, and set aside land for parks.
ü The land had not been acquired with a profit-making intention by resale
ü Nature of the business
· Conclusion: It was held that the proceeds for sale were not income.
EXTRAORDINARY AND ISOLATED TRANSACTIONS
Isolated transaction: not associated with an existing business
Extraordinary transaction: not the normal process of business
v FCT v Whitfords Beach Pty Ltd
· Facts: the taxpayer company had acquired land for the recreational purposes
of its shareholders. Some 15 years later, the company was taken over and the new shareholders caused the company to undertake subdivision and resale
of the land.
ü The courts have labelled transactions that are one-off in nature
and not undertaken by an existing business operation
as “isolated transactions”
ü The development and sale was so extensive
that it had the characteristics of a business
ü Extensiveness of isolated transaction influences whether it generates ordinary income
· Conclusion: the sale and developing land generated ordinary income.
v FCT v Myer Emporium Ltd
· Facts: (“Myer”) had decided to diversity
its operations. To obtain in funding for this diversification, Myer entered into a prearranged series of transactions under which Myer sold certain shares in subsidiary companies to an associated company for $80m, then on 6 March lent that $80m to Myer Finance Ltd at an interest rate of 12.5%pa. As arranged, three days later on 9 March 1981, Myer assigned to Citicorp Canberra Pty Ltd (“Citicorp”) for seven years and three months the moneys due or to become due as the interest payments …” on Myer’s loan to finance. In return, Citicorp paid Myer a lump sum of $45,370,000. Citicorp had tax losses available to wipe out any tax liability on the interest payments from Finance. The court found as a fact that all the transactions were interlocked and interrelated, and that Myer would not have made the loan to Finance if Citicorp had not agreed in advance to take the assignment of income and pay the lump sum of $45.37m to Myer
ü The proceeds from an extraordinary transaction will be ordinary income if it satisfies the requirements of either
the first strand of Myer or
the second strand of Myer
ü First strand of MYER
: extraordinary or isolated transactions
that satisfy three particular requirements will be ordinary income
o There was a business operation
or commercial transaction
o There was a profit-making intention upon entering
o The profit was made by means consistent with the original intention (the way the profit is eventually made must be consistent with the original profit making intention of the taxpayer entering the transaction: Westfield v FCT)
(Gains made from isolated or extraordinary transactions may nevertheless still be of an income nature where they arise from business operations or commercial transactions entered into by taxpayers with the intention or purpose of making a profit)
ü Second strand of MYER: the proceeds from a transaction will be ordinary income if the taxpayer sells the right to income from an asset
without selling the underlying asset.
· Conclusion: the proceeds were ordinary income
FIRST STRAND OF MYER:
u Westfield Ltd v FCT
Facts: the taxpayer was in the business of designing ,constructing and operating shopping centres. Westfield purchased a piece of land with the intention of jointly developing a shopping centre on the land with AMP. At the time of purchase the taxpayer knew there was a possibility that it might end up selling the land to AMP rather than developing a shopping centre, but selling it was its original intention. Eventually the taxpayer did sell the land to AMP rather than developing a shipping centre
The transaction was an extraordinary transaction as the proceeds of the sale were not the normal proceeds of the taxpayer’s business
Profit of sale would be ordinary income if the requirements of the first strand of Myer were satisfied
The way the taxpayer made profit was inconsistent with the original profit-making intention
Decisions: the proceeds from sale were not ordinary income
u FCT v Cooling
Facts: the taxpayer was a partner in a Brisbane law firm which wished to move premises. Upon signing the lease for the new premises, the landlord paid a lease incentive of which cooling received a share. As lease incentive is when the landlord gives the lessee money as an inducement to enter into the lease. At that time it was common in Brisbane for lease incentives to be paid upon a commercial lessee entering into a long-term commercial lease
Moving premises from time to time was in the ordinary course of the taxpayer’s businessè normal proceeds
Satisfy Myer’s principle
Conclusion: the lease incentive was ordinary income
INCOME FROM PROPERTY
Tax payer sold the property in return for:
a capital sum to be paid in instalments, as in Foley v Fletcher – in which case the payments are capital, not ordinary income
v Egerton-Warburton & Ors v DFCT (1934)
· Facts: the taxpayer was a farmer who sold his farm to his sons. Payment for the farm was to be $1,200 pa for the duration of his life, and after this death payment of $1,000 pa for his wife for the rest of her life and a lump sum to his daughters and grandchildren
ü he had not sold the farm, he had used the farm to purchase an annuity, ie uncertain what you get back
ü no fixed grossed sum- cant decide how long he goanna liveè not capital gain
· Conclusion: it was annuity
v WHITAKER V FCT
· Facts: the taxpayer was awarded compensation of about 808000 following surgery which left her blind. The sum awarded included pre-judgement interest of 65000.whitaker also received approximately 288000 in post-judgement interest because the compensation remained unpaid for over two years
ü Pre-judgement interest: capital nature
ü Post-judgement interest: income
RENT AND LEASE INCOME
Royalty is a payment that is calculated based on the usage
of intellectual property or the quantity/value of a substance taken, such as local taken from a mine：
When a taxpayer is paid for use of his or her intellectual property
When the owner of intellectual property agrees to sell his or her intellectual property for an amount based on its usage
When someone is paid to produce intellectual property and the payment is based on its subsequent usage
Where a taxpayer is paid for his or her physical resources based on the quantity resources taken
v McCauley v FCT:
· Facts: Taxpayer was a dairy farmer. He owned land on which trees were growing. Taxpayer was approached by a sawmiller, and entered into an agreement with him. The sawmiller agreed to pay him for the right to cut and remove the timber, at a rate of 3/- for every 100 yards cut.
· Principle: the payments were made by the person for the grant of a right to enter upon the land and cut timber and were made based on the quantity of timber cut.
· Conclusion: royalties
v Stanton v FCT
· Facts: Taxpayer was a grazier who had some timber on his land. He entered into an agreement with a sawmiller, who agreed to pay him a lump sum amount based on the amount of timber standing on the land. The amount payable was payable quarterly, and became due independently of whether the timber was cut and removed or not.
Issue: Was taxpayer assessable on those payments?
ü Selling for a lump sum
ü the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken or the occasions upon which the right is exercised
· Conclusion: not a royalty
v MNR’s case: not royalty , is annuity?
Capital Gain Tax
Step One: Have you made a capital gain or loss
Step Two: Work out the amount of the capital gain or loss
Step three: Work out the net capital gain or loss for the income year
STEP ONE: Have you made a capital gain or loss
A taxpayer makes a capital gain or loss if and only if, a CGT event happens: s102-20
Has a CGT event happened to the taxpayer?
The first step is to determine whether a CGT event happens to the taxpayer’s situation. If more than one CGT event happens, subject to certain exceptions, you use the one that is the most specific to the situation: s102-25(1)
u S104-10 Disposal of a CGT asset: CGT event A1
Nature of the event: A1 happens if you dispose of a CGT asset. You dispose a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
Time of the event: a)when the taxpayer enters into the contract
b) If there is no contract- when the change of ownership occurs ：FCT v Sara Lee Household & Body care
c) In the context of an acquisition, the court was held that an oral contract,
whether enforceable of not, will determine the date of acquisition: McDonald v FCT
d) Where the contract is preliminary and not the actual contract for acquisition, the date of acquisition will be the latter contract
: Elmslie v FCT
- Capital Gain or Loss:
Capital proceeds> cost base
Capital proceeds: the amount the taxpayer receives, or is entitled to receive from the CGT event.
Cost Base: the total costs associated with the CGT event
exclusions: a capital gain or capital loss you make is disregarded if:
you acquired the asset before 20 September 1985; or
for a lease that you granted:
it was granted before that day; or
if it has been renewed or extended- the start of the last renewal or extension occurred before that day.
u S104-15 Use and enjoyment before the title passes: CGT event B1
Nature of the event: if you enter into an agreement with another entity under which:
the right to the use and enjoyment of a CGT asset you own passes to the other entity; and
title in the asset will or may pass to the other entity at or before the end of the agreement
Time of the event: the time of the event is when the other entity first obtains the use and enjoyment of the asset
Exclusions : a capital gain or loss is disregarded if:
title in the asset does not pass to the other entity at or before the end of the agreement
you acquired the asset before 20th September 1985
u s104-20 Loss or destruction of a CGT asset
: CGT event C1
Nature of the event: if a CGT asset the taxpayer owns is lost or destroyed
Time of the event:
when the taxpayer first receive compensation for the loss or destruction; or
if the taxpayer receive no compensation: when the loss is discovered or the destruction occurred
Exclusions: a capital gain or loss you make is disregarded if you acquired the asset before 20th September 1985
u S 104-25 Cancellation, surrender and similar endings:
CGT event C2
Nature of the event: if your ownership of intangible CGT asset ends by the asset:
being redeemed or cancelled; or
being released, discharged or satisfied; or
being abandoned, surrendered or forfeited; or
if the asset is a convertible interest- being converted; or
If the asset is an option- being exercised.
when you enter into the contract that results in the asset ending; or
if there is no contract- when the asset ends.
a lease is taken to expired even if it is extended or renewed
a capital gain or loss you make is disregarded if :
you acquired the asset before 20th September 1985; or
for a lease that you granted:
a). it was granted before that day; or
b). if it has been renewed or extended- the start of the last renewal or extension occurred before that day.
u S 104-30 End of option to acquire share etc:
CGT event C3
Nature of the event: if an option a company or a trustee of a unit trust granted to an entity to acquire a CGT asset that is :
shares in the company or units in the unit trust; or
Debentures of the company or unit trust.
Time of the event: when the option ends
Exclusions: disregarded if it granted the option before 20th September 1985
u S 104-40 Granting an option
: CGT event D2
D2 does not happen if C3 applies to the situation, ie the option is for the acquisition of shares in a company. And it does not apply to an option relating to a personal use asset or a collectable.
Nature of the event: if you grant an option to an entity , or renew or extend an option you had granted
Time of the event: when you grant, renew or extend the option.
Exclusions: a capital gain or loss you make from the grant, renewal or extension of the option is disregarded if the option is exercised.
u S 104-150 Forfeiture of deposit
: CGT event H1
Nature of the event: if a deposit paid to you is forfeited because a prospective sale or other transaction does not proceed.
Time of the event: when the deposit is forfeited
Capital Gain or loss: You make a capital gain if the deposit is more than the expenditure you incur in connection with the prospective sale or other transaction.
is the asset a CGT asset?
S108-5: CGT asset
(1). A CGT asset is:
a. any kind of property;
b. a legal or equitable right that is not property
(2). Specific CGT assets:
a. part of, or an interest in, an asset referred to in subsection(1);
b. goodwill or an interest in it;
c. an interest in an asset of a partnership
d. an interest in a partnership that is not covered by para (c).
3 categories of assets:
- CGT asset
- Personal use assets
artwork, jewellery, an antique, or a coin or medallion; or
a rare folio, manuscript or book; or
a postage stamp or first day cover
That is used of kept mainly for personal use or enjoyment.
the item must be one of the kind listed
the asset must be used or kept mainly for personal use or enjoyment
When an item is defined as a collectable, there are four specific rules that apply:
capital gains and losses made from collectables are disregarded where the first element of the asset’s cost base is $500 or less
When working out the cost base of a collectable, disregard the third element (non-capital costs of ownership).
Capital losses from collectables can only be used to reduce capital gains from collectables. è Quarantining rule: any losses not used in the current tax year can be carried forward to be offset against gains from collectables in future years. S 108-10(1)
if you own collectables that are part of a set, then that set of collectables is treated as a single collectable
Personal use asset:
S 108-20 (2):
A personal use asset is:
a. a CGT asset(except a collectable) that is used or kept mainly for your personal use or enjoyment
b. an option or right to acquire
a CGT asset of that kind; or
c. a debt
arising from a CGT event in which the CGT asset the subject of the event was one covered by para (a); or
d. a debt arising other than:
i. in the course of gaining or producing your assessable income; or
ii. from your carrying on a business
Where an item is defined as a “personal use asset”, there are four specific rules that apply:
capital gains made from personal use assets are disregarded where the first element of the asset’s cost base is $10000 or less
when working out the cost base of a personal use asset, disregard the third element ( non-capital cost of ownership)
A capital loss made from a personal use asset is disregarded.
If you own personal use assets that are part of a set, then that set of personal use assets is treated as a single collectable personal use asset.
Real property and buildings: separate CGT assets
A PERSONAL USE ASSET DOES NOT INCULED LAND OR BUILDING: S108-20(3)
- If a taxpayer has acquired land before 20th
September 1985 and constructs a building on the land after that date, the building is a separate asset.
S108-55(2): a building or structure that is constructed on land that acquired before 20th September 1985 is taken to be a separate CGT asset from the land if:
you entered into a contract for the construction on or after that day
if there is no contract- the construction started on or after that day
- A depreciating asset under Div 40 that is part of the building is a separate asset.
S 108-60: a depreciating asset that is part of a building or structure is taken to be a separate CGT asset from the building or structure
Improvements to a pre-CGT asset will be a separate post-CGT asset where its cost base at the time of the CGT event is more than the improvement threshold ($50000 indexed from 1985)and more than 5 percent of the capital proceeds to the event.
S 108-70(2): a capital improvement to a CGT asset that you acquired before 20th September 1985 is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is:
a. more than the improvement threshold for the income year in which the event happened; and
b. more than 5% of the capital proceeds from the event
Time of acquisition of CGT asset:
Reasons for considering the time of acquisition:
an asset acquired before 20th September 1985 is generally exempt from capital gains tax
Indexation or the CGT general discount only applies where an asset is held for at least 12 months.
S 109-5: general acquisition rules:
- In general, you acquire a CGT asset when you become its owner. In this case, the time when you acquire the asset is when you become its owner
- Specific rule: where taxpayer acquires an asset as a result of a CGT event
Dose an exception or exemption applies?
The most common exception that in Div 104 applies to CGT events where a CGT asset acquired before 20th
exempt gains and losses on certain assets
exempt or loss denying transaction
Small business relief
cars, motor cycles and valour decorations: s 118-5
A capital gain or loss you make from these CGT assets is disregarded:
i. a car, motor cycle or similar vehicle;
ii. A decoration awarded for valour of brave conduct
collectable and personal use asset: s 118-10
A capital gain or loss you make from a collectable is disregarded if the first element
of its cost base, or the first element of its cost if it is a depreciating asset, is $500 or less
A capital gain from a personal use asset or part of the asset is disregarded if the first element of the asset’s cost base, or the first element of its cost if it is a depreciating asset, is $10000 or less
Capital loss from personal used asset is disregarded: s 108-20 (1)
assets used to produce exempt income: s118-12
A capital gain or loss made from a CGT asset that is used solely to produce exempt income
or non-assessable non-exempt income is disregarded
depreciating assets : s 118-24
A capital gain or loss made from a CGT event that involves the disposal of a depreciating asset
is disregarded provided the event is also a balancing adjustment event where the asset was used wholly for a taxable purpose and the decline in value was worked out s118-24
If the asset was not used wholly for a taxable purpose, any disposal of it may give rise to both a capital gain or loss and a balancing adjustment
trading stock: s 118-25
A capital gain or loss made from a CGT asset is disregarded if the asset is a trading stock
Exempt or loss denying transaction:
gambling and competitions with prize
A capital gain or loss is disregarded
if it is made from a CGT event that relates directly to compensation or damages received for any wrong or injury suffered in an occupation or for any wrong, injury or illness that a taxpayer or a relative suffers personally: s 118-37
A capital gain or loss made from a CGT event relating to gambling, a game or a competition with prizes is disregarded: s118-37 (c)
However, the exemption will not apply to capital gains or losses where the taxpayer is considered to be in the business of gambling under the ordinary income provisions.
Anti- overlap provisions:
If an amount is considered ordinary or statutory income under another provision of ITAA 1997 or 1936, that amount will not
be included in the capital gain.
S 118-20: a capital gain you make from a CT event is reduced if, because of the event, a provision of this Act includes an amount in:
a. your assessable income or exempt income; or
b. you are a partner in a partnership, the assessable income or exempt income of the partnership
Small business relief:
3 basic requirements:
– It’s a Small Business Enterprise (turnover < $2M: s.328-110), or net value of assets ≤ $6M: s152-15
– It passes the active asset test: s152-35 & 152-40
– If the asset is a share it represents a significant holding in the enterprise: “significant individual” test: s152-50 [20% holding]
Any capital gains on the disposal of a CGT asset owned for at least for 15 years where the taxpayer is 55 years of age or over and retiring or is permanently incapacitated.
S 152-105: if you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:
a. the basic conditions in s152-A are satisfied for the plan
b. you continuously owned the CGT asset for the 15-year period ending just before the CGT event
50% reduction S 152-205:
Allows a qualifying taxpayer to reduce the amount of its capital gain by 50%.
A taxpayer may choose to disregard a capital gain arising from the sale of a CGT asset connected with a small business if the proceeds are used in connection with the taxpayer’s retirement. Lifetime limit: $500000
- If the taxpayer under 55, the proceeds must be paid into a complying superannuation fund.
- If the taxpayer is over 55, the concession is available automatically.
S 152-305: if you are a individual, you can choose to disregard all or part of a capital gain if:
a.the basic conditions in s152-A are satisfied for the gain; and
b. if you are under 55 just before you make the choice- you contribute an amount equal to the asset’s CGT exempt amount to a complying superannuation fund or an RSA; and
c. the contribution is made:
i. if the relevant CGT event is J2,J5,or J6- when you made the choice
ii. otherwise- at the later of when you made the choice and when you receive the proceeds
A taxpayer may defer paying tax on a capital gain made from a CGT event in relation to a small business if the taxpayer acquires a replacement active asset and elects to obtain a roll-over. S152-410
Main residence exemption:
replacement asset roll-overs
same asset roll-overs
A gain or loss because of a CGT event happening to an individual taxpayer’s main residence is generally ignored.
: full exemption è s 118-110:
A capital gain or loss you make from a CGT event that happens in relation to a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:
a. you are an individual; and
b.the dewelling was your main residence throughout your ownership period; and
c. the interest did not pass to you as a beneficiary in, and you did not acquired it as a trusted of , the estate of a deceased person.
The first positive limb
incurred in gaining or producing assessable income; or ( in the course of gaining or producing assessable income)
necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income
: requires a connection between the expense and the production of assessable income
The second positive limb:
capital or capital in nature
private or domestic
incurred in gaining exempt or non-assessable non-exempt income
prevented from being deducted by a specific provision of the income tax legislation
The connection between the expense and the production of assessable income is determined in the context of the taxpayer’s overall activities and not by narrowly looking at the direct impact of the expense on the taxpayer’s production of assessable income.
Tracing the expenditure:
v Tooheys Ltd v DCT & Sydney Ferris Ltd v DCT
Test for nexus:
incidental and relevant test: to look at the character of the expenditure to ensure it is incidental and relevant to the gaining of the income
essential character test : whether there is a direct nexus between the expenditure and the derivation of income
occasion of expenditure test
perceived connection test ( only for self education): there is a perceived connection between the outgoing and the derivation of the income
Incidental and relevant test:
v Ronpibon Tin (NL) v FCT è this case is also in related to APPORTIONMENT
Ø Fact: the taxpayer companies were no-liability mining companies, registered in Victoria and carrying on the business of mining in Siam and Malaysia. After 1941, the mining business ceased but the companies continued to derive investment income. The taxpayer claimed as deductible expense in 1944 management fees, the cost of cables, stationery, audit fees and payments made to the families of employees who had been interned. The company also participated in a “Buffer stock scheme” from which it derived exempt income.
ü Expenditure must be incidental and relevant
ü There can be no precise formula for apportionment in such cases and it will be necessary to determine a fair and reasonable division based on the taxpayer’s particular circumstances (matter of fact)
Apportionment: a loss or outgoing may still be partially deductible even though:
Some portion of the loss or outgoing does not satisfy either of the positive limb of s8-1; or
Some portion of the loss or outgoing does satisfy one of the negative limbs of s8-1
v Charles Moore & Co Pty Ltd v FCT
Fact: the taxpayer was a retail company, the normal operatons of which included an employee taking the day’s earnings to the bank daily. The employee was robbed while on the way to the bank
Outgoing might be incurred before or after the possibility of assessable income
incurred in gaining or producing assessable income can be interpreted as “in the course of gaining or producing assessable income”
in this case, the taxpayer’s normal business operations included banking the daily earnings and as loss had been incurred as part of that normal business operation, the loss has incurred in the production of assessable income and satisfied the positive limbs of the prdeccessor to s8-1
Involuntary losses or outgoings may be sufficiently connected to the production of assessable income where it arises out of the taxpayer’s income producing activities
v Herald and weekly times Ltd v FCT
Fact: the taxpayer was a newspaper publisher that incurred expenses in the form of damages with respect to libel claims made against it.
The libel or alleged libel was published with the sole purpose of selling newspapers. Therefore the liability to damages was incurred because of the publishing of the newspaper, which was the thing that produces assessable income.
The potential for libel claims was a regular and almost unavoidable incident of publishing, which meant that there was sufficient connection between the cause of the expense and the taxpayer’s business
v FCT v Maddalena
Ø Facts: the taxpayer worked full-time as an electrician and also played football professionally. He incurred travelling and legal expenses coming to Sydney while he was negotiating to transfer to a different club.
ü Outgoing must not be incurred before gaining a job
ü Money spent to obtain a new employment are not allowable deductions for income tax purposes
Meddalena in a business context:
v Spriggs v FCT
Ø Facts: the taxpayers were both professional footballers. Spriggs played in AFL and Ridell played in the NRL. Spriggs had a professional manager called CSM whose functions included searching for sponsorship opportunities, licensing agreements, promotional activities and the gaining of employment contracts in the AFL. During the relevant time Spriggs played for a number of clubs and paid management fees to CSM for season 2004 for $2310 which was claimed as a deduction for the year ended 30 June 2005. Ridell’s situation was similar and he retained the services of SFX as a manager.
ü The cost of management fees incurred in gaining the employment opportunities was held to be a deductible business expense
ü For a professional sportsperson the scope of the business include the use of managers to seek out sponsorship opportunities and gian employment contracts with different clubs
Ø Conclusions: the high court allowed deductions for fees paid to the management companies for activities including the gaining of employment contracts
Temporal nexus—feasibility studies:
v Softwood Pulp & paper Ltd v FCT
Ø Fact: the taxpayer sought to claim under s51(1) of the ITAA 1936 expenditure it incurred investigating the possibility
of establishing a mill in south 代写 to produce paper and associate products. The proposal was abandoned when the company failed to obtain financial backing from a Canadian company.
ü The company had not approached to the stage of making a decision about carrying on a business
ü Noting has been done which could be said to be carrying on a business or anything associated with or incidental to the actual carrying on of a business
ü Everything which was done was concerned with making a decision whether or not steps should be taken to set up a business, but no decision on even that matter have been reached.
ü The expenditure was incurred in order to determine whether the business should be commenced. At the time it was incurred the taxpayer was not gaining or producing income
ü Expenditure not deductible because it is not incurred in the course of gaining income
Ø Conclusion: the submission was rejected
v Goodman Fielder Wattie Ltd v FCT
Ø Facts: the taxpayer company carried on business in multiple divisions. It entered into a contract with the Queensland institute of technology in August 1981 to fund the establishment of a monoclonal antibodies development centre. There were potential commercial advantages. In 1982 it leased separate premises for development and production facilities. Sales took place but after technical problems arose the taxpayer sold the division in 1985. The taxpayer claimed the expenses for both periods. The commissioner claimed that the taxpayer did not commence business until 1982 and the expenditure after that date was on capital account
Ø Conclusions: the judge agreed that the business did not commence until 1982 but held that the expenditure after that date was on revenue account.
Expenditure incurred after cessation of the business:
vPlacer Pacific Management v FCT
Fact: the taxpayer incurred expenses in satisfying obligations arising out of its previous business of manufacturing conveyor belts. At the time of incurring the expenses, the taxpayer was only involved with the investment and management of related companies
The expenses arose out of or were caused by the taxpayer’s past activities of manufacturing conveyor belts, form which it produced assessable income. The fact that the business had since cease was therefore irrelevant
v FCT v Brown
Ø Facts: the taxpayer and his wife borrowed money to enable them to purchase a business in November 1988. The proceeds of the sale were applied to reduce the loan but the taxpayer continued to repay interest and principal until 1995. It was not clear whether the loan contract allowed an early repayment but the court accepted that the bank probably would have permitted it. The commissioner argued that the taxpayer could not deduct interest after the business had been sold on the grounds:
The taxpayer voluntarily decided not to pay out the loan; and
The repayments were not sufficiently linked to the carrying on of the business
Ø Conclusion: although the business had been sold did not break
the nexus between the earning of the income and the necessity to pay the interest. It did not matter that the taxpayer may have been able to repay early. Nevertheless it is possible that there should be a sufficient gap after selling a business which would mean the interest would cease to be deductible
v FCT v Jones
Ø Facts: the taxpayer and her husband carried on a business in partnership until he died. They had borrowed money against the security of the family home and used the money to fund the business. The loan could be repaid at any time but there was a penalty for early payment. When the business ceased the taxpayer continued to make the loan repayments and after five years refinanced at a lower rate of interest. The commissioner alleged that the interest was not deductible after the cessation of the business activities
ü The loan in the present case was not a “rollover” business loan facility but one that would run for the agreed term unless the taxpayer decided to repay early
ü The refinancing did not break the nexus between the interest expense and the business
Ø Conclusion: the court found for the taxpayer: she could not afford to repay the loan early so there was a clear nexus between the borrowing and the business operations. The refinancing gave the interest the same characteristic as it had under the original loan
Expenses involving alleged or actual wrong doing by taxpayer
v FCT v Day
Fact: the taxpayer was a customs officer who was charged with filing to fulfil his duties as an officer under the public service act 1922. the taxpayer incurred legal expenses in defending the charges, which involved a variety of allegations, including improper use of his position, assisting with an improper diesel fuel rebate claim, improper use of work vehicle tec.
The expenses resulting from the taxpayer’s alleged or actual wrongdoing can satisfy the second positive limb.
incurred in gaining or producing assessable income can be interpreted as “in the course of gaining or producing assessable income”
The legal expenses were incurred by the taxpayer in gaining or producing assessable income as the occasion of the expenditure arose out of his income-producing activities.( he was subject to the act because of his employment)…. The legal expense related to defending himself against charges under that act.
v Herald and weekly times Ltd v FCT
Fact: the taxpayer was a newspaper publisher that incurred expenses in the form of damages with respect to libel claims made against it.
The libel or alleged libel was published with the sole purpose of selling newspapers. Therefore the liability to damages was incurred because of the publishing of the newspaper, which was the thing that produces assessable income.
The potential for libel claims was a regular and almost unavoidable incident of publishing, which meant that there was sufficient connection between the cause of the expense and the taxpayer’s business
v FCT V Snowden & Wilson ( same as Herald and weekly times)è the taxpayer’s alleged or actual wrongdoing was related to their business activities and the allegations of wrong doing were considered by the courts to be an ordinary incident of the particular business
- A deduction is available in these situations regardless of the taxpayer’s guilt or innocence in relation to the allegation
Deductibility of interest:
As a general rule, the deductibility of interest expenses will depend on the taxpayer’s use of the borrowed funds, where the taxpayer uses the borrowed funds to gain or produce assessable income
v Interest free loan to subsidiaries—FCT v Total Holdings Pty Ltd
Ø Fact: the taxpayer was a wholly owned subsidiary of a French company, CFP. The taxpayer’s activities consisted of acquiring and holding shares in its wholly-owned subsidiary, TAL, Which marketed and distributed petrol throughout 代写. The French company lent money to the taxpayer and interest was paid on the loan. The taxpayer on-lent some money interest free to its subsidiary, TAL. The commissioner disallowed the interest deduction in relation to the company
ü The activity of the taxpayer were designed to render TAL profitable as soon as commercially feasible and to promote the generation of income by TAL and its subsequent derivation by the taxpayer and thence CFP
Ø Conclusions: the amount was deductible
Role of taxpayer’s purpose:
v Magna Alloys & Research Pty Ltd v FCT
Fact: the taxpayer incurred legal expenses in defending itself and its directors in criminal proceedings.
The legal expenses were necessary incurred in carrying on a business to gain or produce assessable income.
“Necessary” does not mean that the expense has to be unavoidable or essential.
The directors saw that the legal expenses were incurred not only in their own interests but also to protect the taxpayers business .
The business judgement rule: an expense will be necessarily incurred in carrying on a business to gain or produce assessable income where the persons who run the business consider the expense desirable and appropriated in achieving business ends.
A deduction is available in these situations regardless of the taxpayer’s guilt or innocence in relation to the allegations
v Fletcher v FCT è expenses incurred with a tax minimisation purposes
Ø Facts: a complex arrangement whereby the taxpayer effectively incurred substantial interest expenses with little or no actual outlay. The interest expense related to the purchase of an annuity and, under the applicable tax accounting rules, the annuity payments which were assessable income substantially exceeded the interest payments in the early years of the arrangement
ü The subjective purpose or intention for the taxpayer is relevant in this circumstances
ü A taxpayer’s subjective purpose or intention may be relevant where the taxpayer uses the funds in such a way as to only generate a small amount of assessable income
which results in a tax loss
v Putnin v FCT
v Facts: the taxpayer was an accountant and a registered trustee in bankruptcy. He was prosecuted for conspiring to defraud the commonwealth. He was acquitted and claimed a deduction for the legal expense relating to his defence.
Ø Conclusion: The court held the expense were on revenue account and deductible
v Creer v FCT
Ø Facts: the taxpayer was a senior partner in a law firm. The firm’s performance committee reduced his share of the firm’s profit and suggested he retire. The following year the partners further reduced his share and subsequently decided to expel him from the partnership. The taxpayer claim the legal fees deducted
Ø Conclusion: the amount were deductible as they related to the restoration of the taxpayer’s income entitlement
v FCT v La Rosa
Essential character test:
Travel to and from work:
Fact: the taxpayer was a convicted drug dealer who was robbed of cash in the course of purchasing drugs.
Proceeds from an illegal business or activity may be assessable and corresponding expense deductable.
The loss was deductible as it was necessarily incurred in carrying on the taxpayer’s business to gain or produce assessable income
v Lunney v FCT & Hayley v FCT
The taxpayers claimed the cost of their fares when travelling to work. These claims were not allowed.
As a general rule, expenses incurred in travelling between a taxpayer’s home and his or her normal place of work are not deductible under s8-1.
Expenses travel between home and work are considered to be incurred in putting the taxpayer in a position to gain or produce assessable income, rather than in the production of assessable income.
è Private and domestic nature
Travel between two workplaces
v FCT v Payne
the taxpayer was a Qantas pilot who owned a deer-farming property. The taxpayer sought a deduction for expenses incurred in travelling between the airport and the deer farming property
ü The expenses were not succiciently connected to the production of the taxpayer’s assessable income
travel between two unrelated work places will not be a general deduction but may be a specific deductionè
When a deduction is allowed
(1) If you are an individual, you can deduct a * transport expense to the extent that it is incurred in your * travel between workplaces.
Travel between workplaces
(2) Your travel between workplaces is travel directly between 2 places, to the extent that:
(a) While you were at the first place, you were:
(i) Engaged in activities to gain or produce your assessable income; or
(ii) Engaged in activities in the course of carrying on a * business for the purpose of gaining or producing your assessable income; and
(b) The purpose of your travel to the second place was to:
(i) Engage in activities to gain or produce your assessable income; or
(ii) Engage in activities in the course of carrying on a business for the purpose of gaining or producing your assessable income;
and you engaged in those activities while you were at the second place.
(3) Travel between 2 places is not travel between workplaces if one of the places you are travelling between is a place at which you reside.
(4) Travel between 2 places is not travel between workplaces if, at the time of your travel to the second place:
(a) the arrangement under which you gained or produced assessable income at the first place has ceased; or
(b) the * business in respect of which you engaged in activities at the first place has ceased.
No deduction for capital expenditure
(5) You cannot deduct expenditure under subsection (1) to the extent that the expenditure is capital, or of a capital nature.
v Lodge v FCT : not deductible
Research on long service leave:
v FCT v Finn
Ø Facts: the taxpayer was an architect with the western 代写n government who had accumulated both annual and long service leave. The taxpayer planned to use the leave to travel to the UK and Europe to study current architectural trends. The taxpayer’s employer asked him to extend his trip to include South America and the employer agreed to cover the taxpayer’s cost of additional travel. The taxpayer sought a deduction for his travel expenses on the basis that all of his time while travelling was devoted to the study of architecture.
ü The employer had endorsed the taxpayer’s travel
ü The taxpayer had extensive evidence of the information collated while travelling and the fact that the information would improve the taxpayer’s income producing capacity in his current career.
ü As such, the expenses were incurred in gaining or producing assessable income and satisfy the positive limbs
Ø Conclusions: deduction allowed
Self education expenses: TR 98/9
Generally, self-education expenses will be sufficiently connected to the taxpayer’s production of assessable income where:
The education will improve the taxpayer’s prospect of promotion or earning a higher income in the taxpayer’s current career: FCT v Hatchett; TR98/9; FCT v Studdert
The taxpayer works in an occupation which requires them to be constantly up to date: TR98/9
v FCT v Hatchett
(1971) 2 ATR 557 primary school teacher pursuing arts degreeè deduction permitted in related to the teacher’s higher certificate as if has sufficient nexus to his income-producing activities
v FCT v Faichney (1972) 3 ATR 435 CSIRO scientist with home study
v FCT v Studdert
(1991) 22 ATR 762 aircraft engineer incurring expenditure to become a pilot
Reason: the flying lessons would improve the taxpayer’s skill as a flight engineer and lead to a promotion and higher income in his current career. The taxpayer’s ulterior purpose in incurring the expenses on flying lessons was not considered relevant as it was a subsidiary purpose and there was sufficient connection to the production of the taxpayer’s current assessable income
v FCT v Anstis
 FCAFC 154 and  HCA 40
v Note effect of s 82A ITAA 1936
Expenses to reduce future expenditure
v W Nevill & Co Ltd v FCT
Fact: the taxpayer was a company that had two managing directors/ the joint management system was found not to be working and therefore it was decided that the contract of one of the managing directors would be terminated and a compensation payment made.
No expense directly increases a taxpayer’s assessable income and therefore an overall approach is appropriate.
The compensation payment must be viewed in the context with the original agreement with the managing director, which was clearly entered into in the production of assessable income. The compensation payment, which resulted from an amendment to the original agreement must therefore also be for the purpose of gaining or producing assessable income
An expense which improves the taxpayer’s overall business efficiency and operation would be incurred in gaining or producing assessable income
An expense that reduces a taxpayer’s future deductible expenditure is incurred in gaining or producing assessable income
Conclusion: the payment satisfies the positive limbs of the predecessor to s 8-1 and was therefore deductible.
Is there a sufficient temporal nexus or connection to satisfy the positive limbs of s8-1?
Expenses related to the production of future income
v Steele v DCT
Fact: the taxpayer was an individual who had purchased property for use in a business venture. For various reasons, the venture did not go ahead and the taxpayer did not gain or produce assessable income in relation to the property as intended.
- In a business context, expense incurred in anticipation of future assessable income may not be deductible on the basis that the business has not actually commenced at that time
- In an employment context, the courts may find that the expenses are incurred to put the taxpayer in a position to gain or produce assessable income, rather than being incurred in the production of assessable income
such expense would be deductible if the taxpayer could demonstrate that the expenses were incurred in order to gain or produce assessable income.
The taxpayer had no other purpose in incurring the interest expense other than for the production of assessable income.
While the full court’s decision in steele v DCT stands for the proposition that expenses incurred in anticipation of future income may be deductible, this is more likely to be the case where the expenses relate to the acquisition of an income producing asset and such expenses may still be considered to be “too soon” in an employment and business context
Conclusion: the expense was deductible.
Expense related to assessable income in prior years:
If the expenses have been caused by the taxpayer’s prior income producing activities, then they will be deductible.
vAmalgamated Zinc Ltd v FCT
The full court denied the taxpayer deductions for expenses that related to its past business activities, which it no longer carried on at the time the expenses were incurred.
vAGC Ltd v FCT
the full court allowed the taxpayer a deduction for expenses that related to past business activities, however, the difference b/w this case and Amalagamated Zinc is that in this case the taxpayer had restarted its business at the time of claiming the deduction.
è The full court then applied this case to permit taxpayers a deduction for expenses relating to past business activities, even where the business activities have ceased at the time of incurring the expense: FCT v EA Marr and Sons; Placer Pacific Management v FCT
vPlacer Pacific Management v FCT
Fact: the taxpayer incurred expenses in satisfying obligations arising out of its previous business of manufacturing conveyor belts. At the time of incurring the expenses, the taxpayer was only involved with the investment and management of related companies
The expenses arose out of or were caused by the taxpayer’s past activities of manufacturing conveyor belts, form which it produced assessable income. The fact that the business had since cease was therefore irrelevant
No limits on deduction:
v Cecil Bros Pty Ltd v FCT
Ø Facts: the taxpayer was a retailer of footwear. Instead of purchasing its trading stock directly from a manufacturer or wholesaler it arranged to purchase its trading stock at an inflated price through an interposed company. The taxpayer claimed a deduction under s51 (1) for full amount it paid for the stock. The commissioner argued that apportionment should be applied to limit the amount of the deduction to the price the taxpayer would have paid for the stock if it had dealt directly with the manufactures
Ø Principles: since the payment was made for trading stock, the full deduction could be claimed.
v FCT v Philips
Ø Facts: the taxpayer was a partner in a firm of chartered accountants. The case involved deliberate tax minimisation. The partners wished to reduce their ownership of assets which were available to meet claims for professional negligence. The firm set up a unit trust structure to provide non-professional ancillary services to the partnership. These services included: the supply of plant and equipment; organisation of stationery and several supplies; provision of non-professional staff. Unit holders were the family trusts of individual partners. The partnership paid normal commercial rates to the unit trust and claimed a deduction under s51(1)
ü Purpose of outgoing not valuation by the court
Ø Conclusion: the payments were incurred while carrying on business and were deductible in full.
Capital or capital in nature?
An expense that relates to the taxpayer’s income producing structure
will be a capital expense.
Capital expenses generally provide the taxpayer with benefits over a period of years
3 indicators test:
v Sun Newspapers Ltd and associated Newspapers Ltd v FCT
fact: the taxpayer’s principle competitor was the world, the competitor proposed to introduce a rival paper, the Star, which would sell for two-thirds the price of the Sun. the taxpayer made a payment to the World for the right to use its plant and equipment for a period of three years and for an agreement that the World would not establish a new newspaper for the same period. The taxpayer immediately ceased publication of the World once it took over the plant and equipment.
Enduring benefit? Recurrence as a test
3 factors should be considered in applying the distinction b/w business structure and business process: ( all the three factors should be considered together in reaching the conclusion)
character of the advantage sought: whether the expense results in a lasting or a temporary benefit for the taxpayer
manner in which the benefit is to be used: whether the benefit received by the taxpayer is a single, substantial, enduring benefit upon which the taxpayer relies in a constant way
Means adopted to obtain the benefit: whether the taxpayer acquired the benefit through recurrent payments or a one-off payment.
Conclusion: capital expense
v Hallstroms Pty Ltd v FCT
Ø Facts: the taxpayer was a manufacturer of fridges which incurred legal expenses in successfully blocking a competitors application to extend a patent
ü Using enduring benefit test, the court found that the expenses were deductible under s8-1 as they were not capital in nature.
ü The expenses were incidental to the taxpayer’s production of assessable income. The legal expense were incurred to protect the taxpayer’s existing rights and did not result in the acquisition of any new rights or benefit
ü Dixion J in Sun Newspaper said it was capital as it related to the income producing structure and not to income producing processes è only relevant point
Ø Conclusions: not capital natureè should be capital under Dixon J’s dissenting opinion
v Broken hill theatres Pty Ltd v FCT è meaning or recurrant
Ø Facts: the taxpayer was the sole cinema operator in Broken hill. The taxpayer incurred legal expenses in successfully blocking a competitor’s application to operated a cinema. Such applications were conducted annually and therefore the taxpayer argued that the expenses were not capital in nature as they did not provide the taxpayer with a lasting benefit. è conclusion: capital
ü The advantage of being free from competition, even if only for 12 months, was regarded as” just the very kind of thing which has been held in many cases to give to moneys expended in obtaining it the character of capital outlay
ü It was not recurrent in the relevant sense because it was made on a particular and isolated occasion
and it could not be known for certain whether another application would be made by a competitor in future
ü The court focused on the distinction b/w expenses related to the taxpayer’s income-producing structure as opposed to its income producing activities
v John Fairfax & Sons v FCT
Ø Facts: the taxpayer, a newspaper publisher, acquired control of another newspaper company, Associated, through a share allotment. An existing shareholder of associated brought an action in the supreme court of NSW arguing that the share allotment was improper and seeking a declaration that the issuance was void and the taxpayer should be removed from associate’s share register. The taxpayer incurred legal expenses in relation to the court action.
ü The court reject the idea that the expense was revenue in nature (taxpayer’s submission: as they was incurred in protecting its existing rights and that on new rights or benefits were acquired)
ü Affairs of capital, relating as they did to the profit making subject rather than its operation
ü Part of the acquisition cost
Ø Conclusion: capital in nature
v BP 代写 v FCT
Fact: the taxpayer was a petrol wholesaler. The taxpayer entered into “tied house” agreements with several service stations. Under the agreements, the service stations agreed to sell the taxpayer’s petrol exclusively for an average period of just under five years in return for a lump sum payment. Prior to the conclusion of the agreement, the service stations sold petrol from several different wholesalers.
First indicator: the expenses came about because of a change in marketing practices in 1951, the relatively short exclusivity period and the lack of a permanent solution.
Second indicator: the benefit was to be used in the continuous and recurrent struggle to get orders and sell petrol and were part of the ordinary process of selling, which made them revenue in nature
conclusion: the expense were revenue expenses
v Strick v Regent Oil
Fact: the taxpayer secured exclusive sales ties through a leas premium arrangement. Under the arrangement, the retailers leased their stations to the taxpayer for b/w 10 and 20 years in exchange for a lump sum lease premium. The taxpayer then sublet the stations back to the retailers at nominal rent condition that the retailer sold the taxpayer oil exclusively.
Principle: the lease premium payment provided the taxpayer with a substantially longer benefit than the taxpayer in BP 代写.
conclusion: the lease premium payment were capital in nature
and strick suggest that the frequency of payments maybe relevant in characterising an expense as capital or revenue. Other cases indicate that the courts will examine the substance of a payment and not just its form in determining whether an expense is capital or revenue in nature:
v National 代写n Bank v FCT
Fact: the taxpayer made a large lump sum payment to the commonwealth government. In return, the taxpayer became the exclusive lender under a commonwealth subsidised home loan scheme for members of the defence force for a period of 15 years. The taxpayer sought a deduction for the lump sum payemt on the basis that it was akin to a marketing expense or minimum loyalty payment.
Principle: the character of the advantage sought was the expansion of its customer base and the potential increase in its income from loan activities. Importantly, the payment was not considered to create a monopoly or add to the structure of the taxpayer’s business as defence force members were not required to obtain their home loan from the taxpayer and could go to other banks.
Conclusion： The lump sum was a deductible revenue expense.
l Colonial Mutual life assurance society Ltd v FCT
Fact: the taxpayer purchased a block of land. The consideration for the transfer was a rent charge to be paid monthly for a period of 50 years. The rent charge was equal to 90% of the annual rents on three shops and a basement on the transferred land. Payment of the rent charge was conditional on the rent being received.
The so-called rental payments were in effect consideration for the acquisition of the land
The rent constitute the price payable on the purchase of land
If the payment are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature
Conclusion: the rent charge is capital expense
v FCT v Star City
Fact: the taxpayer had an exclusive license to operate a casino in Sydney. Under the terms of its agreement with the NSW government, the taxpayer was granted a 99-year lease over the land where the casino was located and a 12-year exclusive license to operate the casino. The taxpayer was required to make an upfront payment for the licence plus a payment of $120 Million, which was described as prepaid rent for the first 12 years of land rental.
Principle: the document clearly indicated that the value of the rent was related to the benefits that would be enjoyed by the taxpayer in operating the casino under an exclusive licence, and held that the rent was a capital expense.
conclusion: rent was capital expense
· FCT v Consolidated Fertilisers
Ø Facts: the taxpayer was a manufacturer of pesticides and fertilisers. The taxpayer had obtained a licence from a US company to sell particular products, incorporating specific technology, in 代写. The developer of the technology commenced an action against the US company which could potentially affect the taxpayer’s rights under the licensing agreement. The taxpayer incurred legal expenses in joining the defence of the US firm.
ü The taxpayer was already the possessor of a profit yielding subject and the legal expenses were incurred to protect that source of income.
ü The expenses to protect a business will be capital in nature where they are incurred on an isolated occasion
for that purpose, while such expenditure incurred in the course of the prudent management of the business would be a revenue expense.
ü In this case the taxpayer’s licencing agreement could be threatened by a number of parties and the protection of the technology was a regular incident of the taxpayer’s business.
Ø Conclusion: not capital
• Section 8-5
• Divisions 25 [specific deductions] and 26 [deduction denying provisions] ITAA 1997
– Vehicles: Div. 28
– Entertainment: Div.32
– Clothing: Div.34 [see text para 9.241 and TR97/12]
– Gifts: Div. 30
– Prior year[s] tax losses: Div. 36
As a general rule of staturory construction, the specific deduction provision would usually be the more appropriate provision. Where an expense is not deductible under a specific deduction provision, because ither the expense does not satisfy the requirements of the specific deduction provision or there is no applicable specific deduction provision, the taxpayer should consider the deductibility of the expense under the general deduction under s8-1.
(1) You can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.
Property held or used partly for that purpose
(2) If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances.
No deduction for capital expenditure
(3) You cannot deduct capital expenditure under this section.
To claim a deduction for repairs under s25-10 (1), it is necessary to show that:
· The expenditure relates to a repair
· The property is used for income-producing purposes
· The expense is not
a capital expense
Meaning of the repair:
Repair need to be distingguished from renewal, rebuiding,or replacement of the whole.
· Lurcott v Wakely and Wheeler: repair is renewal or replacement of subsidiary parts of the whole. Renewl, as distinguishe from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substaintially the whole subject matter under discussion. Repair and renewal are not expressive of a clear contrast
. Repair always invovles renewal: renewal of a part or of a subordinate part
Types of expenditure:
ð The court will look at 3 types of expenditure when deciding whether it is deductible or on capital account:
· Whether you have replaced the whole item (capital) or a subsidiary part (repair)
· Whether you have replaced an item (deductible) or improved it to such an extent it has become a new item (capital); and
· New property which has to be repaired before the item can be used to produce income: called initial repairs
and regarded as part of the cost of acquisition (capital)
initial repairs are repairs undertaken to remedy defects which exist at the time the property is acquired. The courts have held that such repairs are not deductible as they are capital expenses. The court held that such repairs are not deductible as they are capital expense: Law Shipping Co Ltd v FCT; W Thomas & Co Pty Ltd
Even where the taxpayer may not have been aware of the defects at the time of acquisition, initial repairs are still not deductible: W Thomas & Co Pty Ltd
The test is that the defects must have existed at acquisition time
and not that the repairs have to be undertaken at that time. Repairs undertaken at a later point in time may still be treated as initial repairs if the defects existed at the time of acquisition. Similarly, repairs made soon after the property is acquired may not necessarily be initial repairs and it would depend on whether the defects existed at the time of acquisition.
v Thomas & Co Pty Ltd v FCT
the taxpayer carried on a business of flour miler and grain merchant. It employed a regular maintenance staff to care for its premises and plant. The company bought a building because it needed further storage space. Six months later when it bought a bag-making business it altered the second floor of the new bulding to enable that business to be carried on there. The company claimed a deduction for the following expenditure:
· Roof and guttering – the evidence showed old iron was replaced with galvanised iron, perspex skylights were added to improve lighting and guttering was completely replaced
· Repair to walls- the crumbling walls were replaced with cement render
· Painting- the walls to be scrubbed because of the previous owner’s use of the building and two coats of piant applied
· Basement floor- the taxpayer’s heavy storage bails had broken up the surface of the floor; there was also a damp problem. The person who repaired the floor gave evidence that the asphalt laid on top of the existing brick and concrete was cheaper than replacing the floor with new concrete; and
· Wooden floor- new boards were installed in the wooden floor and some supports were replaced
When an item purchased for use as an asset in the course of producing assessable income is not in good order or suitable for use in the way intended, the cost of making it suitable is part of the cost of its acquisition, not a cost of its maintenance
The expenditure was capital and was similar to an initial repair
The building was a entire asset
Cost of repairing items of equipment after acquisition:
v Law Shipping Co Ltd v Inland Revenue Commissioners
the taxpayer purchased a ship which required repairs to be carried out as a result of a Lloyd’s survey. The taxpayer obtained permission to undertake one voyage to fulfil a contract before effecting the repairs. The taxpayer wished to claim the cost of the repairs as a deduction
the repair is an addition to the initial cost and therefore an amount of capital expenditure
initial repairs no deductible
enhance the efficiency or character of the property
ð The work done to property may surpass being a repair and constitute an improvement : capital
ð A repair may constitute an improvement if the material used to repair the property are different to the original materials ;or
ð where the work done to the property involves technological advancements
A REPAIR SHOULD ONLY RESTORE THE PROPERTY TO ITS PREVIOUS CONDITION
· Part of the asset: repair ( do not have independent use)
· Whole asset: capital è Lindsay v FCT
An asset will be an asset in itself where it is separately identifiable from the entire asset and is capable of being useful on its own.
v Lindsay v FCT
the taxpayer was a member of a partnership which carried on the business of slip proprietors and ship repairers at a site on the Brisban river. The taxpayer claimed a deduction under s53(1) for work undertaken on one of its two slipways. Reinforced concrete was used instead of timber but the evidence showed there was no difference in cost; suitable timber was unavailable; and concrete was no more durable than timber. The reconstructed slipway was a lot longer than the previous one and the taxpayer had not claimed the cost of extension
The slipway is an entirety itself
Becase substantially the whole slipway was demolished. The slipway itself constituted an entirety and the work done was a renewal of the entirety, not repair
The replacement of a whole asset is capital expense
4. Expenditure that goes beyond restoration by renewal or replacement of subsidiary parts will not be a deductible repair
v BP Oil Refinery Ltd v FCT
the taxpayer had operated oil refinery since 1965. It used an ultraformer as part of its plant to extract petrol and other substances from crude oil. Platinum was a catalyst used in this process. The taxpayer claimed depreciation deductions on the plant. In 1980 when the platinum was sold and the ultraformer used elsewhere in the refinery, the commissioner assessed the taxpayer under s59(1) in relation to both the ultraformer and the platinum.
The refinery was supported by wooden piles which were there to protect it against marine organisms. These piles were covered with concrete to prevent further damage. They did not have any effect on this previous damage. The taxpayer claimed deduction
Work will not be considered repair unless it includes some restoration of something lost or damaged, whether function or substance or some other quality or characteristics
This work did not achieve that, it just added something: both the substance by which the piles were encased and the capacity of the submerged parts of the wharf to avoid attenuation by the activities of the marine organisms.
improvement not repair
No deduction for notional repairs
Taxpayers are only entitled to a deduction under s 25-10 for the actual expenditure incurred by the taxpayer on repairs and not some notional (theoretical or estimated) amount.
v FCT v Western Suburbs Cinemas Ltd
the taxpayer company replaced the ceiling in a cinema it owned in Strathfield. The company’s architect decided it was impractical to repair the ceiling since the new and superior ceiling material was now available. The taxpayer claimed a deduction for the estimated cost of repairing the ceiling
The use of new material was an improvement and the purported repair changed the character of the property and did not merely restore it to its previous condition
2. It did much more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future
The deduction was for notional repairs. The test of deductibility depend on the actual cost incurred by the taxpayer
Ruling TR 97/ 23
4. In this Ruling, the expression 'initial repair'
refers to a repair by a taxpayer that remedies some defect in property or makes good damage to, or deterioration of, property being a defect, damage or deterioration:
(a) Existing when the property was acquired from another person (whether by purchase, lease or licence); and
(b) Not arising from the operations of the taxpayer who incurs the repair expenditure.
5. A repair is not an 'initial repair' simply because it is the first repair made after property is acquired. It is an 'initial repair' if repair is due when the property is acquired in the sense that the property has defects, damage or deterioration or is not in good order and suitable for use in the way intended.
Ordinary meaning of 'repairs'
14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.
16. To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental
degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial
improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.
Maintenance work - whether 'repair'
19. Work done partly to remedy or make good defects, damage or deterioration does not cease to be a repair if it is also done partly - even largely - to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property or in rectifying defects in their very early stages. Repairs are not confined to rectifying defects, damage or deterioration that has already become serious. Work done to property not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10
38. Property is more likely to be an entirety if:
* The property is separately identifiable
as a principal item of capital equipment; or
* the thing or structure is an integral part
, but only a part, of entire premises and is capable of providing a useful function
without regard to any other part of the premises; or
* The thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or
* The thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.
39. Property is more likely to be a subsidiary part rather than an entirety if:
* It is an integral part of some larger item of plant; or
* The property is physically, commercially and functionally an inseparable part of something else.
Initial repairs are of a capital nature and not deductible
60. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to or deterioration of, property is capital expenditure if the defect, damage or deterioration:
(a) Existed at the time of acquisition of the property; and
(b) Did not arise from the operations of the person who incurs the expenditure.
61. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes)  1 All ER 681 is not authority in 代写 for a contrary view. An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit - yielding structure. It is capital expenditure and is not deductible under section 25-10.
Amount paid for lease obligation to repair
Where a lessee is obliged
to carry out repairs in respect of premises used to gain assessable income, the lessee is entitled to deduction for payment made as a compensation for failure to repair
You can deduct a debt in the income year if:
· it was included in your assessable income for the income year or for an earlier income year; or
· it is in respect of money that you lent in the ordinary course of your business of lending money
There are four conditions which must be met before s 25-35 operates:
1) there must be an existing debt
at the time it is written off;
the courts have consistently held that, where a debt has been cancelled under a scheme of arrangement or a lesser amount accepted in final satisfaction of the whole, there is no longer an existing debt to write off : Point v FCT, G E Crane Sales v FCT, FCT v Betro Harrison Constructions
2) the debt must be written off as bad;
Bona fide commercial assessment that the debt is unlikely to be paid
3) the debt must have been brought to account as assessable income
, or must have been in respect of money lent in the ordinary course of a money-lending business
4) the debt must have been written off
during the year of income
The taxpayer will not be entitled to a deduction for bad debt under s 25-35 where all of the four elements are not satisfied: Point v FCT
v Point v FCT
the taxpayer entered into an agreement to release a debtor from its obligations to the taxpayer in one income year and the debt was written off in the taxpayer’s accounts in the following income year
1) In the first year the taxpayer was not entitled to a deduction as the debt had not actually been written off while a deduction was not available in the following year as there was no debt in existence at that time.
2) Bad debts cannot be retrospectively written off after the year of income has closed.
non deductible for bad debt
v G E Crane Sales Pty Ltd v FCT
the taxpayer company carried on a business of factoring debts. No notice of the assignment was given to the trader’s customers as both parties wished them to be unaware of the arrangement. When the taxpayer was in financial difficulties it entered into a scheme of arrangement under which all debts from the factoring were to be paid to the receiver and manager. The creditors released the taxpayer from all its liabilities. The taxpayer instructed the receiver and manager to claim a deduction for outstanding debts and for the balance of debts which had been compromised by acceptance of a lesser amount.
1) If the debt has been cancelled and replaced by a scheme of arrangement then there is no debt to write off
2) The compromise arrangement meant the balance of the debt could not be written off. under the terms of the scheme of arrangement unpaid debts belonged to the receiver and the manager, not the taxpayer
3) Taxpayer must write off the debt before a compromise is sanctioned by a court
v FCT v Bestro Harrison Constructions Pty Ltd
the taxpayer was a building company in a group of interrelated but separate companies dealing in development and real estate that conducted intra-group transactions. These resulted in outstanding debts from one company in the group to another. The group became insolvent and entered into an arrangement to sell the business to its finance company. St George Finance Pty Ltd. The taxpayer claimed a deduction for debts owed to it by the other companies in the group.
1) the debt was still there and would be able to be written off
v FCT v Marshall and Brougham Pty Ltd
the taxpayer was the financial manager for a group of companies whose business was large-scale building. The taxpayer always arranged to collect progress payments in advance of its liability to pay its subcontractors. It invested these advances in short-term securities. The taxpayer’s income came from its management fees and the interest it earned on these short-term deposits. When a company which held the taxpayer’s funds went into receivership, the taxpayer wrote off $500,000 as irrecoverable
The taxpayer was not in the business of money lending and therefore could not deduct the money
the business the taxpayer engaged in might be regarded as a separate enterprise of diversion from its ordinary business
the loss should be in capital nature
RULING TR 92/ 18
Debt (paragraph 25)
2. To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as bad
. A debt exists for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from another either at law or in equity.
Bad debt (paragraphs 26 - 33)
3. A debt need not necessarily be bad in the strict sense as described in paragraph 26. The question of whether a debt is bad is a matter of judgment
having regard to all the relevant facts. Guidelines for deciding when a debt is bad are at paragraphs 31-32
. Generally, provided a bona fide commercial decision is taken by a taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad for section 63 purposes. The debt, however, must not be merely doubtful.
4. Where a trustee in bankruptcy, receiver or liquidator advises a creditor of the amount expected to be paid in respect of the debt (i.e. the extent to which the amount likely to be received is less than the debt) is accepted as bad when the advice is given.
Writing-off of bad debts (paragraphs 34 - 39)
5. The bad debt has to be written off
in the year of income before a bad debt deduction is allowable under section 63. The writing-off of a bad debt does not necessarily require highly technical accounting entries. It is sufficient that some form of written
record is kept to evidence the decision of the taxpayer to write off the debt from the accounts.
Debt brought to account as assessable income - paragraph 63(1)(a) (paragraphs 40 - 41)
6. If a taxpayer is not
carrying on a business of money lending
, a bad debt deduction is not allowable under paragraph 63(1)(a) unless the debt has been previously included in assessable income
. A taxpayer who is not a money lender and returns income on the basis of cash receipts will not be entitled to a deduction for bad debts because the debts have not been brought to account by the taxpayer as assessable income.
Money-lending business - paragraph 63(1)(b) (paragraphs 42 - 46)
7. Paragraph 63(1) (b) applies to taxpayers who are engaged in a money lending business
. The question of whether a taxpayer is carrying on a money-lending business is a question of fact
. For the purposes of paragraph 63(1) (b), a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner
with a view to yielding a profit
SECTION 51 (paragraphs 57 - 68)
10. Certain taxpayers who fail to satisfy the requirements under section 63 may be entitled to a bad debt deduction under subsection 51(1). Any business losses or outgoings of a revenue nature are an allowable deduction under subsection 51(1) when incurred. Whether or not a loss occasioned by a bad debt is of revenue or capital nature depends upon a consideration of the facts and circumstances in each case.
11. A loss occasioned by a bad debt is clearly incurred when the loan is disposed
of, settled, compromised or otherwise extinguished
. Where a debt is not disposed of, settled, compromised or otherwise extinguished, it is accepted that the loss of the debt is incurred under subsection 51(1) when it is written off as bad in the same way as in section 63.
SUBSECTION 63(3) (paragraphs 69 - 71)
12. Where a taxpayer recoups an amount which has previously been allowed as a bad debt deduction under either of subsections 63(1) or 51(1) the taxpayer will have to include this amount in assessable income pursuant to subsection 63(3).
PARTIAL DEBT WRITE-OFFS (paragraphs 72 - 83)
13. It is not necessary
for a taxpayer to write off an entire debt
to obtain a bad debt deduction under section 63. A taxpayer is entitled to a deduction for that part of a debt which is bad and is written off. The same tests for deductibility apply as for the whole of a debt.
14. A partial bad debt deduction may arise where debt is secured by property. Where the debt is discharged only to the extent of the net amount realised from the sale of the security and the remaining debt is still outstanding, the remaining debt (i.e. any deficiency between the net proceeds of the sale of the security and the amount of the debt) would be deductible as a partial bad debt only if and when
it is found that the remaining debt could not be recovered from the debtor (i.e. the requirements of section 63 are met). The same principle applies where the security is held, for example as mortgagee in possession, rather than sold. In this situation, the remaining debt that may be written off as bad is the deficiency between the market value of the security and the amount of debt.
15. Where the security is taken in full satisfaction of the debt
, no bad debt deduction is allowable under section 63 unless
the bad debt is written off before
the debt is extinguished.
What constitutes a 'debt' for section 63?
25. A debt may be defined as a sum of money due from one person to another. As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity, it is accepted that a debt exists for the purposes of section 63. There is a debt for the purposes of section 63 where a taxpayer has merely an equitable entitlement to the debt
( G.E. Crane Sales Pty Ltd v. F.C. of T.
(1971) 126 CLR 177, 71 ATC 4268, 2 ATR 692).
When will a debt be bad?
26. Whether a debt is bad depends upon an objective consideration of all the relevant circumstances of each case. Strictly speaking
, in the case of an individual debtor, a debt is not 'bad' until the debtor has died without assets, or has become insolvent and his estate has been distributed, or the debt has become statute barred. In the case of a corporate debtor a similar situation would arise on receipt of the liquidator's final distribution or when the company is completely wound up.
27. However, because subsection 63(3) contemplates that an amount may subsequently be received in respect of a debt previously written off as bad, it is considered that, for the purposes of section 63, the debt need not necessarily be 'bad' in the strict sense as indicated in paragraph 26 above.
28. In support of the view expressed in paragraph 27, Harvey ACJ in Elder Smith & Co Ltd v. Commissioner of Taxation
(NSW) (1931) 1 ATD 241, (affirmed in Elder Smith v. F.C. of T.
(1932) 47 CLR 471) considered a similar bad debts provision in the State Income Tax (Management) Act 1928 (NSW). He made an obiter
observation that the legislation contemplated a debt being bad where it was 'a conjectural bad debt for the time being' (at p. 242). Similarly, in Anderson and Halstead Ltd v. Birrell
(1932) 16 TC 200 Rowlatt J, in considering the English legislative provision for bad debts, said that an 'estimate' was required as to the extent a debt is bad for the purpose of a profit and loss account. Such an estimate he said 'was a valuation of an asset (the debt) upon the facts and probabilities at the time the writing off of the debt takes place'. The Taxation Board of Review in Case 26
(1945) 11 CTBR (OS) 94 also observed at p.94 that '[i]t may happen - although it seems quite improbable - that through some turn of fortune portion of the amount in question will yet be recovered, but any such consideration cannot affect the issue.'
29. As long as the commercial judgment pointing to the relevant facts indicates that a debt is bad for the time being, the debt is accepted as bad for section 63 purposes. It is not essential that a creditor take all legally available steps to recover the debt. What is necessary is that the creditor make a bona fide assessment, based on sound commercial considerations, of the extent to which the debt is bad.
30. Although the debt need not be bad in the strict sense it must nonetheless be more than merely doubtful. For example, a debt will not be accepted as bad merely because a certain set period of time for payment (e.g. 180 days or 270 days) has elapsed with no payment or contact having been made by the debtor.
31. A debt may be considered to have become bad in any of the following circumstances:
The debtor has died
leaving no, or insufficient, assets out of which the debt may be satisfied;
The debtor cannot be traced
and the creditor has been unable to ascertain the existence of, or whereabouts of, any assets against which action could be taken;
Where the debt has become statute barred and the debtor is relying on this defence (or it is reasonable to assume that the debtor will do so) for non-payment;
If the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the whole debt, or the part claimed as a bad debt;
Where, on an objective view of all the facts or on the probabilities existing at the time the debt, or a part of the debt, is alleged to have become bad, there is little or no likelihood of the debt, or the part of the debt, being recovered.
32. While individual cases may vary, as a practical guide a debt will be accepted as bad under category (e) above where, depending on the particular facts of the case, a taxpayer has taken the appropriate steps in an attempt to recover the debt and not simply written it off as bad. Generally speaking such steps would include some or all of the following, although the steps undertake
n will vary depending upon the size of the debt and the resources available to the creditor to pursue the debt:
Reminder notices issued and telephone/mail contact is attempted;
A reasonable period of time has elapsed since the original due date for payment of the debt. This will of necessity vary depending upon the amount of the debt outstanding and the taxpayers' credit arrangements (e.g. 90, 120 or 150 days overdue);
Formal demand notice is served;
Issue of, and service of, a summons;
Judgment entered against the delinquent debtor;
Execution proceedings to enforce judgment;
The calculation and charging of interest is ceased and the account is closed, (a tracing file may be kept open; also, in the case of a partial debt write-off, the account may remain open);
Valuation of any security held against the debt;
Sale of any seized or repossessed assets.
While the above factors are indicative of the circumstances in which a debt may be considered bad, ultimately the question is one of fact and will depend on all the facts and circumstances surrounding the transactions. All pertinent evidence including the value of collateral securing the debt and the financial condition of the debtor should be considered. Ultimately, the taxpayer is responsible for establishing that a debt is bad and bears the onus of proof in this regard.
33. Subsection 63(2) provides for a debt being bad where the debtor has become bankrupt or has executed a deed of assignment or scheme of arrangement. The debt will be bad to the extent to which the amount of the debt owed to a taxpayer exceeds the amount, if any, which will be received by the taxpayer. Where the trustee in bankruptcy, receiver or liquidator advises the creditor of the amount expected to be paid in respect of the debt, the remainder of the debt can be written off as bad when the advice is given.
A deduction for a bad debt is allowable in the year of income in which the debt is written off
34. It is not enough to simply make a provision for a bad debt. The debt has to be written off as a bad debt and it has to be written off before year's end. The question has often arisen as to what the term 'written off' means. In Case 33
(1941) 10 TBRD 101 the Taxation Board of Review expressed at p.103 the view that:
'... the writing off of a bad debt does not necessitate a particular form of book entry or even a book entry at all. It is sufficient, we think, if there are written particulars - there must, of course, be something in writing - which indicates that the creditor has treated the debt as bad.'
35. There is a requirement that the debt has to be physically written off. Note the following relevant comments of the Chairman of the Taxation Board of Review in Case 28
(1947) 13 TBRD 223 at p.239:
'"Bad debts written off as such in the year of income": I am unable to share the view that the condition denoted by these words can be satisfied where, in respect of a debt owed to the taxpayer concerned, there is no evidence whatever that anything was put in writing, in the year of income, from which it could be gathered that the taxpayer intended to treat the debt as bad. The words are plain and positive and they are so clearly objective that their very purpose seems to me to be to put the onus upon any taxpayer who seeks to obtain the benefit provided by the section to prove (if so required) by sufficient evidence that there was a physical writing off of the debt in the year of income..... However, the need for the condition as to the writing off of bad debts is fairly apparent. Against any suggestion that the condition that the debts must be bad makes the further condition superfluous, it has to be borne in mind that in the average case that taxpayer must be allowed a considerable latitude in the exercise of his judgment as to the extent to which any particular debt is bad, the reason being that it is frequently impossible to foresee future events which might affect the worth of the debt. The Commissioner is in no better position and, although Section 63(3) is the logical and necessarily intended corrective of the excessive writing off of bad debts by reason of errors of judgment or the unavoidable failure of careful forecasts, the statutory condition as to writing off is a necessary corrective of the difficulties which would arise ... as to which year among several a debt is to be claimed or treated as bad.'
36. The requirements of section 63 may be satisfied even though a debt is not written off in the books of account
, for example, section 63 will still be satisfied in the following circumstances:
a Board meeting authorises the writing off of a debt and there is a physical recording of the written particulars of the debt and Board's decision before year end but the writing off of the debt in the taxpayer's books of account occurs subsequent to year end;
a written recommendation by the financial controller to write off a debt which is agreed to by the managing director in writing prior to year end followed by a physical writing off in the books of account subsequent to year end.
37. No deduction will be allowed in a year, if the debt is written off after the year's end at the time when the books of account are being prepared (i.e. as a balance day adjustment made after the close of the income year). The decision of Owen J in Point v. F.C. of T.
(1970) 119 CLR 453, 70 ATC 4021, 1 ATR 577 makes this requirement quite clear. At CLR p. 458, ATC p. 4023, ATR p. 580 Owen J said:
'The fact is, however, that during that year neither that nor any other figure was written off by the appellant as a bad debt. The entry purporting to write off $X as a bad debt was not made until many months after the end of that year and, in my opinion, the Commissioner rightly refused to apply section 63. For the appellant, however, it was argued that the words in the section, "written off as such during the year of income", are not to be given what appears to me to be their plain meaning and that the section is sufficiently complied with if the debt is not written off "during the year of income" but at some later date, provided that the writing off relates back to the year of income. I am unable to accept this proposition. "During the year of income" means in my opinion "in the course of the year of income". No doubt if a debt is written off as bad after a year of income has passed, it will be allowable as a deduction in the year in which the writing off takes place, provided of course that the other conditions laid down by the section are fulfilled.'
38. Furthermore, it is essential that a debt be in existence in order that it may be written off as bad
. Point v. F.C. of T.
(supra) also demonstrates that a debt cannot be written off after it has been settled, compromised, otherwise extinguished or assigned
. In that case, the taxpayer released a debtor from a debt under a scheme of arrangement in the 1964 income year. In the following income year the taxpayer purported to write off the debt as bad under section 63. Owen J held that at the time of the purported writing off there was simply no debt in existence because it had been extinguished in the previous income year. A similar conclusion was reached in Franklin's Selfserve Pty Ltd v. F.C. of T.
(1970) 125 CLR 52, 70 ATC 4079, 1 ATR 673 and G.E. Crane Sales Pty Ltd v. F.C. of T.
(supra). Therefore, once a debt has been settled, compromised, otherwise extinguished or assigned no further amounts can be claimed as bad debts for the purposes of section 63
. This principle equally applies where the extinguishment of the debt and the writing off of the debt occur in the same financial year. If the writing-off of the debt occurred after the extinguishment or the disposal of the debt, no deduction is allowable under section 63.
It is, therefore, important that a creditor should not delay the writing-off process until after the debt is extinguished.
39. The mere writing-off of a debt does not necessarily relieve the debtor from ever having to pay the liability. If the financial position of the debtor subsequently improves or the circumstances which led to the debt being written off alter, action may be taken to collect the debt. However, no amount is to be treated as assessable income under subsection 63(3) until such time as the debt (or part of it) is recovered.
TRAVERL BETWEEN WORKPLAC
Cash receipt method
: under this method a taxpayer brings to account as assessable income all cash received during the year of income.
Accruals or earnings method
: under this method the taxpayer derives income when he or she has earned the right to payment of a sum of money.
Meaning of derived:
S 6-5 (4)
: in working out whether you have derived an amount of ordinary income, and (if so) when you derived
it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
S 6-10 (3)
: if an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.
* Brent v FCT:
- Fact: Brent accept offer to enter into an agreement which provided that, in return for making her self available for the interviews by journalists and signing the manuscript of her life story, she would be paid a total of $ 65250. the work was completed by the end of October 1969 and in February 1970 the commissioner issued a notice of assessment which showed the taxable income of Mrs Brent to be $65250, despite the fact that to that date she had only received $10000 on the signing of the contract.
Brent does not ask for payment and the company refrained from making payment.
s 19 or ITAA 1936 would not applied. Income is not dealt with, under s 19, when all that happens is that a debtor refrains from paying his debt at the request of the creditor.
the income would not have been used on her behalf and the company would have remained under an obligation to pay her.
- Conclusion: the only assessable income in the relevant year was $10000 actually paid to her by 30 June 1970.
The appropriate method of accounting
At times ITAA give no choice for choosing methods, but, if there is not a method prescribed by the ITAAs the court have stated that the method to be used is the one which gives the true reflex of the taxpayer’s income.
* Commissioner of Taxes v Executor Trustee & Agency Co of South 代写 Ltd ( Carden’s case)
- Facts: Dr Carden practised medicine in South 代写 for many years before his death which occurred on 15 November 1935. Up to the year of income beginning 1 July 1929, Dr Carden submitted his annual returns using the accruals or earnings basis
. For the year of income beginning 1 July 1929 he changed the basis upon which he returned his professional income to the cash receipts method
. He continued to do this until the last assessment preceding his death, namely, 30 June 1935, that is, earned by the doctor at the date of death but received after his death, as a capital asset of the estate, the commissioner issued an assessment for this period using the accruals basis and also sought to amend the prior assessments for the years of income ending 30 June 1934 and 30 June 1935 to reflect an accruals basis of tax accounting.
there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstanding on the expenditure side do not correspond to, and are not naturally connected with, the outstanding on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment
the receipt was a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree
- Conclusion: cash receipt was the appropriate method
The enquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayers true income
2. The cash basis is appropriate. Such professional income that flows primarily from personal services and has only minor expenses, no trading stock and no fund of circulating capital. Should use the cash basis
- Special issues:
the method appropriate to be used in the year of death: amount received after death are capital hence shift to accruals
What factors should the taxpayer take into account when determining which method should be used?
• It is a question whether you have trading stock
• Level of overheads eg. employees and premises.
• The volume of bad debts.
• The general size
of the enterprise.
• If you had a business which has a very high level of bad debts, so that eg, bad debts constitute 50% of all your sales, in that case you might have an argument to bring the money into account when it is actually received as it gives a truer reflection of the actual income I have actually derived.
Income from professional practice
The cash receipt basis was challenged in Henderson v FCT.
Large professional practice should use the accruals basis. See: Henderson’s case below.
* Henderson v FCT
An accountant in a practice. Over time the accounting practice got quite large. It was on a cash basis, and then they took on more partners, employees, bigger premises etc. At the end of 1963, he decided to change, due to size of business growth, from a cash basis to accruals basis. Where the work was done and bill sent in period to 30 June 1963, but received after that date it was not taxable in 1963 on a cash basis as the money had not been received by year end, and would not be assessed in 1964 on an accruals basis. The Commissioner sought to assess this income for 1963 on cash basis.
carden’s case was appropriate to determine the income of the professional practice carried on by the taxpayer personally are not present to the case
the cash basis was accepted in small professional practices
: The High Court said no. It is a matter of law. The taxpayer was quite justified in 1963 in using the cash basis, and in 1964 in using accruals basis. Accruals were appropriate given the size, structure and operation of the accountancy partnership.
: large professional firms the appropriate method to be used in calculating taxable income is the accrual system.
· FCT v Firstenberg
the taxpayer was a solicitor who was a sole practitioner with only one secretary. He ran his accounts on a cash basis and had done so for 20 years. The commissioner requested the taxpayer change over to an accrual basis. The taxpayer argued that Henderson v FCT was not appropriate for his circumstances
In the case of a sole professional practitioner the essential feature of income "derived" is receipt. - Carden’s case applied. Henderson’s case distinguished
It is a question of fact in each case whether receipts basis or accruals basis constitutes the correct method of ascertaining assessable income. The accruals basis is an artificial, unreal and unreasonably burdensome method of arriving at income "derived" in the case of a professional practice of the kind conducted by the taxpayer
Certainty of payment is low, thus a receipt basis of accounting would alone reflect truly the income and for most professional incomes it is the more appropriate
No fund of circulating capital from which income or profit must be detached for actual employment
There was no danger of an element of capital creeping into the assessable income of the taxpayer and there was no need to employ accounting technique such as the “accruals basis”
The taxpayer is more readily assimilated with that of a wage earner or salaried man who would ordinarily be understood as having derived only the income which he had received into his hands or which he had under his control
cash basis is appropriate
· FCT v Dunn
the taxpayer was a chartered accountant and a sole practitioner. Although he had several employees. He was responsible for co-ordinating and organising all the professional work. Accounts were sent out when work was completed except for a few clients who were billed quarterly.
cash basis should be adopted.
Problems of changing methods:
Some receipts may be taxed twice or never be taxed. The solution of this problem offered y the full high court in Henderson’s case, the commissioner to go back and amend assessments of previous years.
Amounts received but not yet earned (prepaid)
· Arthur Murray Pty Ltd v FCT
The taxpayer company received advance payments of fees for dancing tuition courses to be performed in future income years and provided a discount for prepayments. There were no contractual rights to refunds if a student did not take all lessons. Some refunds were in fact given. When fees were received in advance they were credited to an ‘Unearned Deposits —Untaught Lessons Account’ rather than shown as income.
The High Court said the test is whether what has taken place is enough to satisfy the general understanding among practical business people of what constitutes derivation of income. On the facts here, the accounting treatment indicated that income was derived and treated as revenue, not in the suspense account, but in the “Taught Lessons a/c”. This was held to be relevant but not decisive. The High Court said as a matter of business prudence the taxpayer should not treat the income as being derived in the suspense a/c because of the contingency that it would have to be paid back if the lessons were not given. The fact that there was no right to a refund did not matter, as in many cases refunds were in fact given. The High Court said that if the company did not give the lessons they would be sued. The accounting records were a fair indication of how a practical businessman would treat that receipt.
According to established accounting and commercial principles, in the case of a business either selling goods or supplying services, amounts received in advance of the goods being delivered or the services being supplied are not regarded as income. We have not been able to see any reason which should lead the courts to differ from accountants and commercial men on the point.
The advance fees were not income. They were subject to a contingency since some or all of the fees may have to be paid back. This was also supported by the appropriate accounting treatment in books
· Country magazine Pty Ltd v FCT
Ø Facts: the taxpayer published magazines. Money received for “subscriptions in advance” was put aside, but nevertheless this money was include as part of the taxpayer’s assessable income in the year of the taxpayer received it. After the decision in Arthur Murray, the taxpayer no longer includes subscriptions paid in advance in its annual income, but waited until those subscriptions had been filled. The taxpayer changed the accounting system and excluded the amounts relating to filled subscriptions on the basis that tax had been paid on that income in the previous year. The commissioner argued that the amounts should have been included in the year in which the subscriptions were filled although they had been previously taxed.
Ø Ratios: switch from accrual to cashè certain amount is taxed twice
Retail credit sales
The issue of when a retailer who sells on credit to a consumer derives income from that sales was discussed by Rowe’s case
· J Rowe & Son Pty Ltd v FCT
the company sold good for cash, on 30-day terms or on terms whereby the customer paid a small deposit and instalments for a period of up to five years with an interest component of 11 per cent per annum apportioned over the term. The company took a bill
of sale over the goods which stated that the purchaser acknowledged there was valid and enforceable debt owing to the company which was the balance secured should at the option of the company become immediately due and payable. There was no dispute that the items sold were trading stock
and subject to the trading stock provisions of the ITAA 1936. In determining its assessable income for the year the company deducted money it spent on purchasing trading stock but included in its assessable income from the sales of its stock on credit only those instalments of the purchase price and interest which had actually been paid
or were payable during the year. The company argued that it did not derive the income until it was received.
is commissioner right on taking the full sale price of good sold on credit terms , excluding interest payment in the future years as income derived by the taxpayer?
A trading business earns its income when goods are sold and delivered, notwithstanding that the price may not be due and payable until a subsequent year of income
The taxpayer, when it sold goods on credit terms, had by the sale and delivery of the goods taken all steps required of it to earn its income and so the income from the sales should be treated as derived by the taxpayer at that time, notwithstanding that payment by the customer may not fall due until subsequent years of income. Further, this treatment would accord with what expert evidence had shown to be the normal business accounting practice in respect of credit sales.
The income from the sale of the stock is derived when the stock is sold and a debt is created.
the commissioner was correct
Time of derivation- commissioner’s view
IT2227: interest charged on overdue customer accounts
It had been suggested that interest charged to an account but not received at the end of the year of income should not be treated as assessable income at that time but at the time when the interest is paid.
Where the provision of credit to customers is a regular feature of the operations of a business and interest charged accrues on a daily basis any interest owing by customers at the end of the year of income would represent, according to ordinary business and commercial principles, part of the earnings of the business for the year. It follows, therefore, that the interest owing by customers at the end of the year is assessable income derived in that year.
If supply of credit is integral to the taxpayer’s business :
ð Use accruals IT 2227
replacing the approach to interest in Rowe
Ruling TR 96/20: income tax: accessibility and deductibility of prompt payment discounts offered by traders of goods to their customers and certain other discount
When a trader sells goods on credit and offers discount for prompt payment, the trader derives the full sale price at the time the sale is made. The discount becomes an allowable deduction to the trader when the customer accepts the discount and the trader’s account receivable from the customer are satisfied.
è Ruling TR 96/20 only accepts this where there is virtual certainty
Receipts vs earnings- commissioner’s view:
Rulings TR 98/ 1
18. The receipts method is likely to be appropriate to determine:
· Income derived by an employee
· Non-business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer
· Business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services, subject to the qualifications listed at paragraph 45.
19. As a general rule, the receipts method is appropriate to determine income derived from investments
. However, there are exceptions to the general rule (refer paragraphs 47 and 48).
20. The earnings method is, in most cases, appropriate to determine business income derived from a trading or manufacturing business
42. Income from employment would normally be assessable on a receipts basis
. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.
Non business income from the provision of knowledge or exercise of skill
43. Income of this type would result from a single or isolated contract primarily involving the use of a taxpayer's particular skill or knowledge. Where the provision of knowledge or exercise of skill possessed by the taxpayer does not amount to the carrying on of a business, the income is assessable on a receipts basis
Business income derived from the provision of knowledge or exercise of skill possessed by the taxpayer
44. Where an individual taxpayer, as opposed to a company (refer to paragraph 39), provides his/her knowledge or exercises skill as part of a business carried on by the taxpayer, the income of the business may represent a reward for the provision of those personal services. Where the income results primarily from the services rendered, or work performed by the taxpayer personally, it is generally assessable on a receipts basis
45. However, the presence of any of the following factors to a significant degree would indicate that the income is not simply a reward for the provision of personal services by the taxpayer:
The taxpayer's income producing activities involve the sale of trading stock
The outgoings incurred by the taxpayer, in the day to day conduct of the business, have a direct relationship to income derived;
The taxpayer relies on circulating capital or consumables to produce income
The taxpayer relies on staff or equipment
to produce income.
46. The presence of any of the above factors to a significant degree indicates that the earnings method
may be the appropriate basis for determining income in respect of the relevant year. In cases where the above distinction is unclear, it may be necessary to consider the other circumstances relevant to the taxpayer and to the way the income is earned (refer paragraphs 52 to 59).
47. The general principle is that interest is only derived, or arises, when it is received or credited
. This general rule is subject to the overall principle that the appropriate method is that giving a substantially correct reflex of income. So exceptions to the general rule include (but are not limited to):
Interest from a business of money lending
carried on by the taxpayer;
Interest derived by a financial institution
(Taxation Ruling TR 93/27); unless from a 'non-accrual loan' (Taxation Ruling TR 94/32);
Interest from the everyday provision of credit
as part of business activities (Taxation Ruling IT 2227);
interest derived by taxpayers, whose other income is calculated on an accruals basis
, who invest in fixed or variable interest securities cum interest (Taxation Ruling TR 93/28); and
Interest from deposits
made in the ordinary course of carrying on a business, where the business income is properly assessable on the earnings basis, may be derived on a due and receivable basis. An example of this would be a large trading business that actively manages its funds on deposits.
Rent and royalties
48. Rent and royalties are generally assessable when received
or applied at the taxpayer's direction. However, where rent or royalties are business income
, a substantially correct reflex of that income may be given by use of the earnings basis
Dispute over amount owing:
If a taxpayer is owed money for goods sold, but the amount of money is subject to a dispute, then at what stage should the money be brought to account as assessable income: when the dispute has been resolved or when the goods have been sold? When the dispute is resolved.
v BHP Billiton Petroleum v FCT
the two taxpayers, BHP and Esso were involved in the production of petroleum products in the Bass Strait. The taxpayers entered into contracts for the sale of gas to six buyers. The buyers agreed to pay an annually determined amount for the gas. However, monthly statements were to be issued and a payment was to be made within 15 days of receipt by the buyer. There was provision in the 12th
month for an adjustment to be made to ensure that the amount to be paid reflected the annual contract amount. Following the replacement of the royalty and excise regime with the petroleum resource rent tax from 1 July 1990, the sellers notified the buyers that they intended to pass on the effect of the PRRT directly to the buyers. The pass-on amount could only be determined some time after gas was delivered.
When the dispute is resolved
Timing of deductions:
S 8-1 permits a taxpayer to claim a deduction for losses and outgoings when they are incurred. For a cash receipts taxpayer this does not always mean when money is actually paid. It is a different test from that of deviation. The courts have not insisted there be an exact matching of income and expenditure, but they have stated that, for an outgoing to be incurred, it must not merely be impending—there must be definite liability to pay.
No requirements for the amount to be actually paid, but it does require a liability to meet the payment that is fixed and cannot be changed.
n New Zealand Flax Investments Ltd v FCT
the taxpayer company bought and cultivated land for flax production. It also sold bonds. Holders of the bonds were given access to the land to cultivate it. Although the bonds were paid either in cash or installments, the company returned as income the full value of the bond. Interest was payable when the company had received the full cash value of the bond. The company wished to deduct the total commission paid or payable to salesmen and all future interest, although only part of both items was actually paid out. (The taxpayer sought a deduction for future interest
that it was required to pay on certain long-term bonds)
1. “Incurred” does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened or expected.
the company can only deduct the amounts which had actually been paid out.
Deductions for provisions è NO deductions for PROVISIONs!
The court refuses to deduct for the provision on the grounds that the outgoing had not been incurred.
(1) You cannot deduct
under this Act
a loss or outgoing for long service leave, annual leave, sick leave or other leave except
(a) an amount
paid in the income year
to the individual
to whom the leave relates (or, if that individual
has died, to that individual
's dependant or legal personal representative
(b) An accrued leave transfer payment
that is made in the income year
v FCT v James Flood Pty Ltd
: The taxpayer company claimed a deduction for amounts it had set aside for employees’ holiday pay. Pursuant to the employees’ award the employees became entitled to receive holiday pay after 12 months continuous service.
Holiday pay was not deductible as it was not incurred. There was no accrued obligation to pay, as that only occurred when the employees took annual leave. Subject to contingency.
S 51(1) requires a commitment to pay the money
The time to claim a deduction is when the employee takes his or her holiday leave and the money is paid and that usually occurs in the later financial year.
: An outgoing is incurred when a taxpayer outlays money for a good, service or other types of supplies. The taxpayer has definitively committed or has completely subjected itself by making payment, thus the outgoing is incurred
Ø Conclusions: refuse to grant a company deduction for money set aside for employees’ leave payment.
v Nilsen Development Laboratories Ltd v FCT
the taxpayer company claimed a deduction for the full amount of accrued long service leave and holiday pay which it owed to employees. The commissioner argued that no deduction could be claimed until the expenditure was incurred.
1. no actual liability at the time making the provision
2. the liability only arose when the leave is taken
Expenditure referable to different income years
v Coles Myer Finance Ltd v FCT
The taxpayer incurred deductions for discounts on bills of exchange and promissory notes. The bills had maturity periods of less than 181 days, were drawn in the current income year but matured in another.
The legal liability to pay incurred in the year of income, the amount in question is not payable until the subsequent year of income.
The net loss or outgoing represents the cost of acquiring funds which the taxpayer puts to profitable advantage in both
year of income
The burden of liability incurred by the drawer increases with the passage of time between the discounting of the note or bill and its maturity.
4. The incurring of a present legal liability on revenue account to pay an amount in a future income year does not
mean the amount is deductible in full
in the income year when the liability is incurred. Must look to see how much of the outgoing is referable to the income year and thus apportion the deduction over the term of the instruments.
1. The joint majority judgment in Coles Myer Finance could possibly be read as applying to all losses and outgoings including prepayments, and that, consequently, such losses and outgoings should be apportioned over the years to which they are properly referable
v FCT v Energy Resources of 代写
the taxpayer obtained finance by issuing promissory notes in US dollars. The exchange rate moved between the date and notes were issued and the date of maturity but there was never a conversion to 代写n currency. The commissioner accepted the discount was deductible under s 51(1) but did not agree with the taxpayer’s method of calculation.
The liability was incurred at the date of issue
Deductions for estimated outgoings:
v RACV Insurance Pty Ltd
: The taxpayer carried on a motor car insurance business and claimed deductions for amounts set aside to cover unreported third party claims, ie, the estimated amount of claims arising out of accidents occurring before the end of the income year but not reported to the company. The Commissioner contested the deduction
The fact that the amount was estimated and that it may have to be adjusted in light of later events does not bar the claim for a deduction. Once the event had occurred, the accident out of which absolute liability arose.
the estimated cost was deductible
v Alliance Holdings Ltd v FCT :
timing advantage of deferred interest securities
the taxpayer was a finance company which lent money and which derived most of its income from interest. The company issued deferred interest debenture stock on terms that the interest would be paid at a stated date and would not be compounded but would accrue from day to day during the life of the debenture. Upon maturity, both the principle amount and the interest would be paid in full. The taxpayer used an accruals method of accounting and matched costs and revenues of each tax year to determine its annual income. It brought to account the amount of interest accruing each financial year, transferred it to a deferred interest debenture suspense account and matched that interest against its annual revenue. The accrued interest was not credited to the accounts of individual stockholders or paid to them until the debentures were redeemed. The taxpayer claimed deduction for interest as it accrued in accordance with its above method of accounting.
not to allocate the interest ultimately due to the debenture holder to the period in which the funds were used would distort
the net earnings of the company and understate its liabilities at the end of the accounting period
The contract which existed between the taxpayer and the stockholders created an obligation on the part of the taxpayer to repay the money lent plus the interest to the stockholder. This obligation was created at the time the contract was entered into although the money was not payable until a future date
agree with the taxpayer
v Merrill Lynch International (代写) v FCT
the taxpayer companies operated separate bonus for different categories of employees. The bonus payment was discretionary on the part of the employer but the employee had an expectation of receiving it. The amount of the bonus was decided after 31 December each year. The taxpayers argued they relied case such as RACV insurance.
The commitment to pay the bonuses did not mean that they were incurred for the purposes of s51 of ITAA 1936 and hence they were not deductible until the year in which they were paid.
Not a legal liability
Even if the taxpayer had promised to pay their employees a bonus, the amount of it would have been inherently incapable of ascertainment or of estimation because the exercise by Merrill Lynch of its discretion was an essential step in the process of determination of the amount
not deductible until the year in which they were paid.