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CORE SECTIONS..............................................................................

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ASSESSABLE INCOME...................................................................6
Assessable Income...........................................................................................6
Income or Capital? Income According to Ordinary Concepts..................8
Is there a business? .......................................................................................10
Derivation of Income.....................................................................................11
Residency........................................................................................................15
For Individuals: s6(1)(a)...................................................................................................15
For Companies: s6(1)(b)..................................................................................................16
For Trusts.........................................................................................................................17
For Partnerships................................................................................................................17
Source of Income...........................................................................................18
Types of Income:..............................................................................................................18
Statutory Income...........................................................................................20
Non-cash benefits from business relationships................................................................20
Accrued Leave Transfer Payments...................................................................................20
Allowances in relation to employment.............................................................................20
Reimbursed car expenses.................................................................................................20
Defence forces rations and quarters.................................................................................21
Return to work payments.................................................................................................21
Employee Share Acquisition Scheme..............................................................................21
Insurance or indemnity for trading loss............................................................................21
Recoupments....................................................................................................................21
Profit on Sale of Leased Motor Vehicles.........................................................................22
Profit Making Undertakings or Plans...............................................................................22
Work in Progress..............................................................................................................23
Royalties...........................................................................................................................23
Insurance Recoveries on Losses of Live Stock................................................................24
Gains on Disposal of Traditional Securities.....................................................................24
Bounty or Subsidy............................................................................................................24
Interest on overpayment of tax.........................................................................................24
Interest under will, etc......................................................................................................24
Bonus................................................................................................................................24
Recovery of Embezzlement, etc, loss...............................................................................25
Meals provided to clients, etc in In-House dining facilities.............................................25
Receipts from a film.........................................................................................................25
Investment related lottery winnings.................................................................................25
Dividends.........................................................................................................................25
Prizes and Awards............................................................................................................25
Personal Services Income.............................................................................26
Exempt Income..............................................................................................28
Exempt Organisations......................................................................................................28
Exempt Amounts..............................................................................................................29
Overseas Employment Income.........................................................................................30
Foreign branch profits......................................................................................................32
Non-portfolio dividends...................................................................................................32

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ALLOWABLE DEDUCTIONS......................................................33
GST Implications...........................................................................................33
Business Deductions......................................................................................34
Some Specific Items Deductible Under s8-1................................................37
Travel Expenses...............................................................................................................37
Interest Expenses..............................................................................................................37
Damages and Penalties.....................................................................................................40
Payments and Benefits provided to employees................................................................40
Foreign Exchange Losses.................................................................................................40
Expenses on Commencement and Cessation...................................................................41
Deductions Under Specific Provisions.........................................................42
Repairs..............................................................................................................................42
Payment for non-compliance with a covenant to repair...................................................43
Bad Debts.........................................................................................................................43
Borrowing costs................................................................................................................44
Mortgage Discharge Expenses.........................................................................................45
Expenses relating to lease documents..............................................................................45
Expenses relating to granting of patents..........................................................................45
Pensions, Gratuities and Retiring Allowances.................................................................45
Tax related expenses........................................................................................................47
Subscriptions....................................................................................................................47
Costs associated with meeting GST obligations..............................................................47
Legal Expenses.................................................................................................................48
PLS 2 -66..........................................................................................................................48
Gifts, Pensions..................................................................................................................48
Loss on Disposal or Redemption of traditional securities................................................49
Debt/Equity Swaps...........................................................................................................49
Payments to Related Entities............................................................................................49
Loss by Theft or Embezzlement.......................................................................................50
Expenditure on Research and Development....................................................................50
Mains Electricity Connection...........................................................................................51
Loss from Profit-Making Undertakings or Plans.............................................................51
Superannuation Contributions..........................................................................................51
Environmental Impact Expenditure.................................................................................51
Environmental Protection Expenditure............................................................................52
Commercial Debt Forgiveness.....................................................................53
Non-Deductible Expenses.............................................................................54
Expenditure related to a capital gain................................................................................54
Taxes, charges, penalties or fines.....................................................................................54
Club Fees and Expenditure Relating to Leisure Facilities...............................................54
Entertainment Expenses...................................................................................................55
Employee car expenses....................................................................................................56
Travel expenses of an eligible relative.............................................................................56
Employee car parking expenses.......................................................................................57
Reimbursement of employee’s expenses.........................................................................57
Non-cash business benefits..............................................................................................57
Occupational Clothing......................................................................................................57
Limits on certain deductions............................................................................................57
Self Education expenses...................................................................................................57

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Anti-Avoidance provisions..............................................................................................58
Employment Deductions...............................................................................59
Specific Deductible Expenses.......................................................................59
Employment Agreements.................................................................................................59
Business association subscription....................................................................................59
Clothing and Laundry.......................................................................................................60
Home office expenses......................................................................................................60
Self-education expenses...................................................................................................61
Motor Vehicle Expenses..................................................................................................62
Superannuation Contributions..........................................................................................63
Prepayments...................................................................................................64
Depreciation and Capital Works.................................................................66
GST related expenses.......................................................................................................70
Computers Hardware and Software.................................................................................70
Deductions for Capital Works......................................................................72
Business Related Cost – Blackhole Expenditure........................................73
Tax Losses......................................................................................................74
Foreign Income Losses.....................................................................................................75
Losses of Previous Years:................................................................................................75
Current year losses...........................................................................................................77
Transfer of Losses............................................................................................................78
Trading Stock................................................................................................80
What is trading stock?......................................................................................................80
Types of trading stock......................................................................................................80
Trading stock – Assessable Income/Allowable deduction:..............................................81
When Is trading stock ‘on hand’......................................................................................82
Trading stock valuation....................................................................................................83
Trading Stock Issues:.......................................................................................................84
Disposal of Trading Stock................................................................................................85
CAPITAL GAINS TAX...................................................................88
What is a CGT Asset?...................................................................................88
Separate Assets.................................................................................................................88
Personal Use Asset...........................................................................................................89
Assets of Non-Residents..................................................................................................90
CGT Events:..................................................................................................90
Which Entity Makes the Gains/Losses........................................................90
Timing of Acquisitions and Disposals:........................................................91
CGT Exemptions and Concessions..............................................................92
Subdiv. 118-A Exemptions..............................................................................................92
Main Residence Exemption.............................................................................................93
Reduction of capital gain otherwise assessable................................................................95
Cost Base and Reduced Cost Base...............................................................96
Capital Proceeds...............................................................................................................96
Cost Base..........................................................................................................................97
Reduced Cost Base...........................................................................................................99
Modifications to Cost Base............................................................................................100

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Calculation of Gains and Losses................................................................102
NET Capital gains and Losses.......................................................................................102
Discount Capital Gain....................................................................................................103
Capital Gain Averaging Provision – Individuals ONLY...............................................104
Rollovers ......................................................................................................105
Disposal or Creation of Assets in a Wholly Owned Company by Individual or Trustee
........................................................................................................................................105
Partnership Asset Rolled over to Wholly Owned Company..........................................106
Transfer of Assets Between Group Companies in the Same Wholly Owned Group.....106
Small Business Concessions........................................................................109
General Conditions.........................................................................................................109
Small Business 15 Year Asset Exemption.....................................................................111
Small Business 50% Active Asset Concession..............................................................111
Small Business Retirement Exemption..........................................................................111
Small Business Asset Rollovers.....................................................................................113
Transitional Provisions...............................................................................114
Change in Majority Underlying Interest........................................................................114
Sale of Pre-CGT Interest in Interposed Entity...............................................................114
PARTNERSHIPS...........................................................................115
Definition of Partnership............................................................................115
Calculating Partnership Net Income or Loss............................................116
WIP Payments................................................................................................................116
Dividends.......................................................................................................................116
Partners’ Salaries............................................................................................................116
Interest Payments...........................................................................................................116
Superannuation contributions.........................................................................................117
Payments to Relatives and Related Entities...................................................................117
Calculation of Partners’ Taxable Income.................................................117
Change in Partnership Structure...............................................................117
TRUSTEES AND BENEFICIARIES...........................................118
Present Entitlement and Legal Disability.................................................118
Trust Income................................................................................................118
What is Taxed?...............................................................................................................118
Residency and Source....................................................................................................118
Trust Losses.................................................................................................119
Trust Loss Tests ............................................................................................................119
Implications of Family Trusts:.......................................................................................122
Net Income v. Accounting Income.............................................................123
Taxation of Trust Income...........................................................................123
Beneficiary Presently Entitled and No Legal Disability................................................124
Beneficiary presently entitled BUT under legal disability.............................................124
Where no Beneficiary presently entitled........................................................................124
Deceased Estates............................................................................................................125
Receipt of trust income NOT previously subject to tax.................................................125
Distributions out of corpus.............................................................................................125

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COMPANIES..................................................................................126
What is a Company?...................................................................................126
Public Company.............................................................................................................126
Company Bad Debts....................................................................................126
Tax Losses [also pg 65]................................................................................126
Implications for Shareholders of Dividends.............................................127
Franking Account........................................................................................128
Penalty Taxes.................................................................................................................128
Franking Account returns and assessment.....................................................................130
Deemed Dividends.......................................................................................131
Distributions by a liquidator...........................................................................................131
Loans and Payments by Private companies...................................................................131
Remuneration and Termination Payments.....................................................................131
Off Market share buy-backs...........................................................................................131
FOREIGN INCOME, DEDUCTIONS AND CREDITS.............133
Foreign Income............................................................................................133
Foreign Losses..............................................................................................134
Foreign Tax Credits....................................................................................134
FRINGE BENEFITS TAX (All Sections in FBTAA)..................136
FBT liability calculation.............................................................................136
Rebatable Employers..................................................................................137
What is a Fringe Benefit?...........................................................................137
Car Fringe Benefit.......................................................................................138
Debt Waiver Benefit....................................................................................139
Loan Benefits...............................................................................................139
Expense Payment Benefit...........................................................................140
Housing Benefit............................................................................................141
Living Away From Home Allowance Benefit...........................................141
Car Parking Benefit....................................................................................141
Property Benefits.........................................................................................142
Residual Benefits.........................................................................................143
Entertainment..............................................................................................143
Other Benefits..............................................................................................144

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CORE SECTIONS
Sec 44(1) Dividends included in assessable income
Sec 207-20(1) Imputation credits included in assessable income – individual and
companies
Sec 6AC Gross foreign income (including withholding tax) included in assessable
income
Sec 79D Foreign deductions are limited to foreign income
Sec 207-20(2) Entitled to an imputation credit tax offset – individuals and companies
Sec 70-35(2) Opening stock > Closing stock = deduction
Sec 207-40(1) Imputation credit gross up and credit – partnerships
Sec 207-40(2) Imputation credit gross up and credit – companies
Sun Newspapers Ltd & Expenses to eliminate the competition are capital
Broken Hill Theatres
Sun Newspapers Ltd Expenses to set up a new market or business are capital
Sec 40-25 Depreciation is deductible
Sec 26-30 Travel expenses for accompanying persons are non-deductible
IT2625 Audit fees not deductible unless incurred – invoices or an agreement or
interim billing
Sec 109 Only a reasonable payment of director’s fees are deductible
S82AAC Superannuation deduction – ABL , paid and complying fund
Sec 43 Capital works after 26/2/92
Sec 165-10 Losses carried forward to reduce taxable income

ASSESSABLE INCOME

Assessable Income
Sec. 4-15 Taxable Income = Assessable Income – Deductible Expenses

Definitions:
Sec 6-1(1) Assessable income is ordinary income and statutory income.
Sec 6-1(2) Statutory income and ordinary income can be exempt income
Sec 6-1(3) Some ordinary income and some statutory income can be neither
assessable nor exempt income.
Sec 6-5(1) Ordinary income is income according to ordinary concepts – assessable
unless exempt or made non-assessable.
Sec 6-10(2) Statutory income is income included in assessable income by statutory
provision (see s10-5 for list of statutory income).
Sec 6-20(1) Exempt income is income made exempt from tax by provision of the Act
(see s11-5 for list of exempt income).

Residency:
Sec 6-5(2) Resident – assessable on ordinary income derived from all sources in or
out of Australia.
Sec 6-10(4) Resident – assessable on statutory income derived from all sources in or
out of Australia.

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Sec 6-5(3)(a) NR – assessable on ordinary income from sources within Australia.
Sec 6-5(3)(b) NR – assessable on other ordinary income on basis other than being
sourced in Australia.
Sec 6-10(5)(a) NR – assessable on statutory income from sources within Australia.
Sec 6-10(5)(b) NR – assessable on other statutory income on basis other than being
sourced in Australia.
Sec 23(r) Income derived by a non-resident from sources wholly out of Australia is
not assessable in Australia.

Sec 17-5 GST:


Amount is not assessable income if it includes GST payable on a taxable
supply.

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Income or Capital? Income According to Ordinary Concepts
Eisner v. MacComber Income is ‘fruit’ and capital is ‘tree’ from which fruit is grown.

Van den Bergh v. Clarke Is it payment for profit making structure?


Is consideration received in the ordinary course of business or is it related
to the ‘whole structure of the taxpayer’s profit-making apparatus’. If it is
structure, it is capital.

Scott v. C of T, GP Character of receipt in taxpayer’s hands


International Pipecoaters Income means ‘income according to ordinary concepts and usages of
mankind. Whether or not particular receipt is income depends on its
quality in the hands of recipient.

Arthur Murray Accounting treatment of item:


Factor to consider whether it is income or capital.

Myer Emporium Ltd v. Converting future income into present income?


FCT If merely converting future income into present income (received in form
of lump sum), then income.
Transaction entered into for profit-making purpose?
Receipt is income if:
 Received in the ordinary course of carrying on a business
 Received outside the ordinary course of business (ie. unusual
transactions) but transaction was entered into with intention of making
profit.
 Received not in the course of business but there was profit making
intention AND the transaction was entered into and the profit was
made in carrying out a business operation or commercial transaction.

McCurry & Anor v. FCT Taxpayers who are NOT carrying on a business:
If a profit is made, then it is income if:
 The taxpayer entered into the transaction with a profit-making
intention; AND
 The transaction was entered into, and the profit was made, in carrying
out a business operation or commercial transaction.

Dickenson v. FCT Payment to replace profit or profit-making structure?


Payment for restriction of taxpayers future income-earning capacity is
capital.
If consideration is to replace profits, then income.
If consideration is to replace profit making capability, then capital.

Scottish Australian Mining Realisation of Asset:


Co Ltd v. FCT; FCT v. Where there is a mere realisation of assets to best advantage, it does NOT
Whitfords Beach give rise to income.

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FCT v. Dixon Voluntary payment or gift:
Voluntary payment or gift received as incidental to employment is
assessable income

Brown v FCT Gift of unit to former politician was remuneration for services rendered.
IT 167 Windfall gains:
In absence of unusual features, a prize winning will not be assessable.

Heavy Minerals Ltd v. Payment for variation, cancellation or breach of contract


FCT Amounts received in relation to variation, cancellation or breach of
ordinary commercial dealing will be income.

Federal Coke Compensation for variation in contract, where no consideration of


payment was given, and payment was not a product of any business or
revenue-producing activity carried on by it - capital
Lease Incentives:
Cooling v. FCT Incentive paid to induce taxpayer to enter into lease of business premises
is income.
Distinguished from:
Selleck v. FCT Incentive was received in respect of establishment of new firm’s first base
of operation.

Compensation Payments:
Liftronic Pty Ltd v. FCT; Amount received as compensation for loss of capital is capital
FCT v. DP Smith Amount received for loss of revenue is income.
McLaurin v. FCT; Allsop If no amount of payment can be identified as income, the entire amount is
v. FCT capital.

Allsop v. FCT If taxpayer has entitlement to a lump sum in full satisfaction of all
entitlements or claims, the payment will be capital in nature.

Whitaker v. FCT Compensation for personal injury is income if in substitution for lost
wages. Otherwise capital.
FCT v. Slaven Compensation for loss of earning capacity is capital.
Barnett v. FCT Motivation of payer is relevant in determining whether receipt is capital or
income.

Where there is a reduction in liabilities:


FCT v. Unilever Aust. For taxpayers in the business of borrowing and lending, profits made in
Securities Ltd the course of business of lending and borrowing money and repaying
loans is income.
Warner Music Aust. P/L v. Does the release of indebtedness constitute a gain on revenue account or
FCT capital account?
Where a trader carrying on a business is required to pay less due to an
exchange fluctuations, it is a gain in the ordinary course of business and
therefore income.

Recoupment of expenses:
Subdiv. 20-A An amount received:
 By way of insurance or indemnity in respect of a loss or outgoing that

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is or was deductible;
 In recoupment of a loss or outgoing that is or was deductible
Is assessable income – assessable in the year of receipt.

Is there a business?
Commercial character:
IRC v. Livingstone; If the activities are carried on in the same way as is characteristic of
McInnes v. FCT ordinary trade in that particular line of business, then business.
View to making profit:
Thomas v. FCT; Ferguson The activities of a business normally undertaken with a view to making a
v. FCT profit.
Scale of business:
Inglis v. FCT The higher the level of activity or the bigger the scale of the activities, the
more likely it will be business.
Systematic and organised:
Evans v. FCT A business should be systematically conducted and organised.

Edwards v Bairstow Characteristics or quantities of goods

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Derivation of Income
Carden’s case Cash v. Accruals basis:
The method to be used depends on its ‘actual appropriateness’ and
whether it provides a ‘substantially correct reflex’ of the taxpayer’s ‘true
income’.

TD 93/18 Factors to be considered in choosing a method:


 Size of business
 Type of business
 Method of accounting
 Current practice in industry
 Overhead costs
 Policy for recovery of outstanding debts

TR 98/1 Receipts method appropriate for:


 Income derived by employee
 Non-business income derived from provision of knowledge or
exercise of skill possessed by taxpayer
 Business income where income derived from provision of knowledge
or exercise skill possessed by taxpayer. EXCEPT:
 Taxpayer’s income producing activities includes sale of
trading stock
 Outgoing incurred in day-to-day operations have direct
relationship to income derived.
 Taxpayer relies on circulation of capital or consumables to
produce income
 Taxpayer relies on staff or equipment to produce income.
 Income from investments. EXCEPT:
 Interest from business of money lending
 Interest from everyday provision of credit as part of
business
 Interest derived by taxpayer whose other interest is
calculated on accruals basis, who invest in fixed or variable
interest securities cum interest; and
 Interest from deposits made in ordinary course of business.

Earnings method appropriate for – business income derived from a trading


or manufacturing business and business income from large professional
practices. Factors:
 Size of business – larger the structure, more likely the reliance on
employees and capital equipment to generate income
 Circulating capital and consumables – larger the reliance.
 Capital items – larger the reliance to earn income on these
 Credit policy and debt recovery – if taxpayer readily gives credit and
relies on amounts owing by debtors to support drawings or other
payments
 Books of account – where books are kept, and the way they are kept.

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IT 2503 Sole professional practitioners and small professional firms may record
income on cash basis.

IT 2639 To determine whether a practice can adopt the cash basis, consider:
 If practice has at least as many non-principal practitioners as principal
practitioners, then income considered to be derived from business
structure – accruals basis
 If fewer non-principal practitioners than principal practitioners,
Commissioner will look at:
 Nature of activities
 Extent to which income depends on taxpayer’s own skill
and judgement
 Extent of income producing assets used to derive income
 Number of employees

Examples of when Cash or Accruals should be used:


Henderson v. FCT Large firm of accountants should bring fees to account on an accruals
basis.
FCT v. Firstenberg Solicitor practicing as sole proprietor who only employed a secretary-
typist-telephonist was held to be assessable on cash basis
FCT v. Dunn Sole practitioner CA who did not generally employ a qualified accountant
but did employ no. of regular employees and took responsibility for all
work emanating from his office was held to be assessable on cash basis.

Constructive Receipt:
Sec 6-5(4) You are taken to have received ordinary income as soon as it is applied or
dealt with in any way on your behalf or as you direct (hence derived it).
Sec 6-10(3) You are taken to have received statutory income as soon as it is applied or
dealt with in any way on your behalf or as you direct (hence derived it).

Arthur Murray Advanced income:


Where advance amounts are received for services to be provided, they are
brought into account as income only when earned.
STRICT APPLICATION:
Advanced income can only be treated as unearned income only if:
 The taxpayer’s financial accounts are prepared on basis that advanced
payments are kept in a suspense or unearned income account and not
treated as income until earned.
 Where advanced payments are credited to revenue, but balance date
adjustment is made to exclude unearned income from P&L
Otherwise, if included in P&L, it is earned income irrespective.

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FCT v. Australian Gas Trading Income – when recoverable debt arises:
Light Co & Anor. Trading income is derived when a recoverable debt comes into existence,
ie. taxpayer not obliged to take any further steps before becoming entitled
to payment.
Gasparin v. FCT Where land is sold as trading stock, the proceeds is recognised as income
on settlement, not when contracts become unconditional – debt accrues to
vendor on settlement (from this day, vendor cannot sue for sale price, only
specific performance or damages).

TD 92/186 Long term construction contracts – two methods:


These are contracts spanning more than 12 months. May return income
under:
 Basic method – where income recognised when invoice is raised or
when contractor is entitled to raise invoice re work done.
 Estimated profit method – determine ultimate profit/loss and recognise
as income in the income year to the extent of completion.

IT 2534 Salary and wages – when received:


Derived when received or otherwise made available to the taxpayer
(whether for past or current services).

TR 93/11 Professional fees (on accruals basis) – when recoverable debt arises:
If professional accounts income on an accruals basis, income is derived
when a recoverable debt is created – ie. person is not obliged to take any
further steps before becoming entitled to payment.
When recoverable debt arises depends on arrangement with client. Eg.
when client is billed, when work wholly completed, when work done
progressively and payment is due at specific intervals.

TR 93/27; TR 98/1 Interest – when received:


Derived when paid or credited
BUT does not apply to banks and financial institutions or where interest is
received as part of normal business activities, eg. overdue trading
accounts – in this case, recognised when derived (IT 2227).

IT2227 Interest on overdue customer’s accounts/trading accounts still owing to a


business at the end of the year of income is considered to be income
derived during the year of income, not when the interest is received.
FCT v Hurley Holdings Commercial Bill premium
Premium is derived on a receipts basis approach, not apportioned over life
of bill
Sec 44(1); TR 98/1 Dividends – when paid:
Derived when received.

Div. 6; TR 98/1 Rent – when received:


Derived when received. EXCEPT where rent is received as part of
normal business activities.

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TR 95/7 Lay-by:
 Derived when buyer pays final instalment and goods delivered to
buyer.
 If lay-by terminated early, then amount forfeited and any associated
costs which the seller retains is derived when sales is terminated.
 For non-refundable service fee, deposit or charge, derived when lay-
by sale entered into.
TR 98/1; TR96/20 Trading stock discount – at time of sale:
When trading stock sold under arrangement which provides for prompt
payment discount, income derived at time of sale for the full invoice
price. If the discount is subsequently accepted, the difference is
deductible at the time that the payment is received.
EXCEPT there must be virtual certainty, in light of past experience and
policy that the discount amount will not be received by trader.

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Residency
International Tax Treaties overrule to ITAA
For Individuals: s6(1)(a)
Sec 6(1) Rules:
There are 4 tests for determining residency for individuals:
a) “Resides” test
6(1)(a)(i) b) Domicile test
6(1)(a)(ii) c) 183 day test
6(1)(a)(iii) d) Cth Government Super fund test

Resides Test:
IT 2681 For business migrants:
 Purpose, frequency, regularity and duration of return trips to country
of origin.
 Family and business ties person has in Australia and country of origin
 Whether he/she is accompanied by his/her family to Australia and on
return trips to the country of origin;
 Whether person is employed in country of origin;
 Whether place of abode is maintain in country of origin or is available
for person’s use while there;
 Whether personal effects are kept in Australia or country of origin;
 Extent to which any assets or bank accounts are acquired or
maintained in Australia and in the country of origin;
 Whether the migrant has commenced or established a business in
Australia.
TR 98/17
[NOTE: not for Australian residents returning to Australia after temporary
stay overseas where they remained residents whilst overseas.]
Looks at the quality and character of an individual’s behaviour while in
Australia over a period of 6 months.
 Intention or purpose of presence;
 Family and business/employment ties;
 Maintenance and location of assets; and
 Social and living arrangements.
Generally, when behaviour is consistent with residing here is
demonstrated over 6 months, the individual is a resident.

For Australians going overseas:


Use IT 2681.

Domicile Test
IT 2650 Domicile is Australia = resident unless person’s permanent place of abode
is outside the country.
For Australians going overseas:
 The intended and actual length of taxpayer’s stay in the overseas
country.
 Whether the taxpayer intended to stay in the overseas country only

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temporarily and then to move to another country or to return to
Australia at some definite point in time
 Whether any residence or place of abode exists in Australia or has
been abandoned because of the overseas absence;
 Whether taxpayer has established a home (ie. dwelling place, house or
shelter that is the taxpayer’s fixed residence) in the overseas country;
 Duration and continuity of the taxpayer’s presence in the overseas
country
 Durability of taxpayer’s association with a particular place in
Australia, ie. maintaining bank accounts in Australia, place of
FCT v. Applegate; FCT v. education for children, family ties, etc.
Jenkins; Case Q68.
Last 3 factors above given more weighting.

Two years away = rule of thumb

For Companies: s6(1)(b)


Sec 6(1)(b) 1936 A company is resident of Australia if:
 It is incorporated in Australia; OR
 It carries on business in Australia AND has either:
 Its central management and control in Australia; or
 Its voting power is controlled by shareholders who are
residents of Australia.

Central Management and Control:


Malayan Shipping Co Ltd The carrying on of a business must be linked with either central
v. FCT management and control in Australia or exercise of voting rights. The
fact that a company has its central management and control in Australia
would provide sufficient evidence to conclude that the company is
carrying on at least part of its business operations in Australia.

De Beers Consolidated Key factor in locating the central management and control is the place
Mines Ltd v. Howe where the directors meet to manage the company’s affairs.

Esquire Nominees Ltd v. Even if directors are effectively influenced by other parties, if the
FCT directors still have the responsibility for management of the company,
where the director’s meetings are held may remain as key factor.

Koitaki Para Rubber If central management and control is spread between two countries, the
Estates Ltd v. FCT company may be resident in both countries.

John Hood and Co Ltd v. Need to determine who actually exercises central management and control
Magee of company. If shareholders in GM actually exercise central management
and control, then it is the place where this meeting is held.

Voting power controlled by shareholders:


Kolotex Hosiery (Aust) In determining control of voting power, may be necessary to consider all
Pty Ltd v. FCT voting rights, not just those attached to issued shares.

16
Adelaide Motors Control means actual control and not the capacity to control
For Trusts
S95(2) Resident trust exists if:
 A trustee of the trust was a resident at any time during the year; or
 The central management and control of the trust estate was in
Australia at any time during the year.

For Partnerships
1936 s92 Impact of Australian laws on partnerships is determined by reference of
each partner and the source of income attributed to them
s90 Partnership net income and loss is calculated on the assumption that the
partnership is a resident

17
Source of Income
Types of Income:
Salary and Wages:
FCT v. French; FCT v. Normally, income is sourced at place where work is performed.
Efstathakis

FCT v. Mitchum BUT if work is of a highly specialised nature or special knowledge, skill
or talent is required to such a high degree, the place where the knowledge
is utilised may be of relatively little importance. Other factors, such as
place where contract is executed is more significant.

Professional Services:
FCT v. Mitchum Sourced at place where services performed. EXCEPT where making of
the contract is more important (see above)

Trading or Business Profits:


C of T (NSW) v. Cam & Sourced at place where trader trades or renders services.
Sons Ltd; Thorpe BUT if acts done by trader consist largely of making contracts, and their
Nominees Pty Ltd v. FCT performance relatively unimportant, then place of contract is significant.

Dividend Income:
Esquire Nominees v. FCT Source is the place where profits out of which dividend is paid were made
(ie. geographical location where income is made).

Sec 44(1)(a) Australian residents include dividends paid out of profits derived from
any source

Sec 44(1)(b) A non-resident shareholder is required to include dividends paid by the


company to the extent to which they are paid out of profits derived by it
from sources in Australia.

Interest income:
Spotless Services v. FCT Source is where the loan contract is made or where the funds are advanced
(ie. where obligation to pay arose).

Sec 25(2) Interest deemed to be sourced in Australia if money borrowed is secured


by a mortgage over any property in Australia.

Rent of Real Property:


Rhodesia Metals Ltd (in Sourced where real property is located.
liq) v. CoT

Rent of personal property:


Sourced where the hiring agreement is executed
Royalties:
Arising from right to use property (eg. copyright, patents, trademarks,
mines, oil fields) – sourced in country in which property is located.

FCT v. United Aircraft Arising from technical knowledge and know-how, then sourced at place

18
Corporation where contract is made and the know-how is provided.

Sec 6C Specifically deems an Australian source for outbound royalties (ie


royalties derived by NR) in most situations.
 For royalties paid to NR by residents which are not incurred by payer
carrying out a business outside Australia or through a PE is deemed to
have a source in Australia.
 For royalties paid to NR by NR where royalties is wholly or partly an
incurred by payer in carrying on business in Australia or through PE
in Australia.

19
Statutory Income
Sec 10-5 Lists the types of statutory income

Non-cash benefits from business relationships


Cooke & Sherden Non-transferable overseas holiday was not convertible into money – not
income

s21A(1) Any non-cash benefit received from business relationships that are not
convertible to cash are treated as convertible to cash, provided it is
otherwise of an income nature

s21A(2) Non cash benefit is brought to account at (a) arm’s length value reduced
by taxpayer’s contribution

s21A(3) If benefit is deductible as an expense of carrying on a business had the


recipient incurred the cost, it is not assessable (otherwise deductible rule)

s23L(2) s21A amounts are exempted if less than $300 in a year of income

Accrued Leave Transfer Payments


Sec 26-10(2) A payment in respect of LSL, AL, sick leave or other leave payment that
an entity makes:
a) re an individual’s leave
b) when entity no longer required to make payment re such leave; and
c) to another entity when the other entity has started to be required to
make payments re such leave; and
d) under an Australian law.

Sec 15-5 Includes in assessable income an accrued leave transfer payment received
by a taxpayer (new employer).

Allowances in relation to employment


Sec 26(e) Includes as assessable income allowances, gratuities, compensations,
benefits, bonuses and premiums provided in respect of, or for, or in
relation directly or indirectly, to any employment or services rendered.
DOES NOT INCLUDE:
 an ETP
 payment in lieu of AL or LSL
 amount deemed to be dividend received
 fringe benefit
 exempt benefit.

Reimbursed car expenses


Sec 26(eaa) Includes in assessable income amounts received by taxpayer as cents per
kilometre reimbursements of car expenses.
NOTE: car expenses specifically excluded from FBT regime.

20
Defence forces rations and quarters
Sec 26(ea) For members of the Defence Forces, required to include allowances
received as assessable income whether it is given in money, goods, meals,
sustenance, use of premises or quarters – UNLESS it is FB or exempt
benefit.

Return to work payments


Sec 15-3 Applies where:
 amount received by taxpayer
 under arrangement that an entity enters into
 for purpose of inducing taxpayer to resume working or, or providing
services to, any entity
Includes amount received in taxpayer’s assessable income.

Employee Share Acquisition Scheme


Sec 26AAC (pre 3/95) Refer to PLS 198 to 1-108
Division 13A (post 3/95)
Insurance or indemnity for trading loss
Sec 15-30 Includes in assessable income an amount received by way of insurance or
indemnity for the loss of an amount that would have been included in the
taxpayer’s assessable income had it been received. AND the amount is
not ordinary income, thereby escaping s6-5.

Recoupments
Subdiv. 20-A Includes in assessable income amounts received as recoupment for certain
previously deductible losses or outgoings. MUST BE assessable
recoupment

Sec 20-20 “Assessable recoupment”


 Not assessable recoupment if it is ordinary income or statutory income
due to a provision outside Subdiv. 20-A.
 Includes amounts received by way of insurance or indemnity for
losses or outgoing deductible under any provision
 Other recoupments (other than insurance or indemnity) only
assessable if they relate to items which are deductions under one of
the provisions listed in s20-30 (ref. Pg 1-20).

Sec 20-35(1) Assessable recoupments are included in assessable income if:


 Can deduct the whole loss or outgoing for current year; or
 Deducted or can deduct whole loss or outgoing for an earlier year.

Sec 20-35(2) Total of amounts of assessable recoupment cannot exceed amount of loss
or outgoing.

Sec 20-35(3) Assessable recoupments received in advance of year in which loss or


outgoing is deducted is treated as received in deduction year.

Sec 20-40(2) Method statement – ref pg 1-22

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Sec 20-45 Amount of assessable recoupment reduced where the loss to which the
recoupment relates was deductible in accordance with capital allowance
provisions and a balancing charge has arisen in the current year.

Sec 20-50(1) Total of what you can deduct for a loss is limited to a proportion of the
loss.

Profit on Sale of Leased Motor Vehicles


Subdiv. 20-B Operates to assess profits on sale of vehicle where:
 Car is leased to the taxpayer or associate
 Lease payments are deductible
 Taxpayer or associate acquires car from lessor
 Taxpayer disposes of car for a profit.

Sec 20-115(2) Consideration receivable:


 If sold for specific price = price – expenses of sale
 Sold with other property and no specific price allocated to car = part
of sale price reasonably attributable to car – expenses attributable
 Traded in to buy another car = value of trade-in + other consideration
received
 Disposed of to an insurer as lost or destroyed = value received under
insurance policy.

Sec 20-115(1) Profit on disposal:


Profit = consideration receivable – (cost to acquire car + any capital
expenditure incurred after acquisition)

Sec 20-110(2); 20-125(2) Assessable amount:


The lesser of:
 Profit on disposal (s20-115)
 Total deductible lease payments for period of lease (s20-110(2)(a))
 Total amounts that could have been deducted for depreciation had the
taxpayer owned the car and used it 100% for business purposes
instead of leasing it. (s20-120; refer Method Statement, p1-25)

Sec 20-130 If there are 2 or more leases of the car resulting in different amounts to be
included in assessable income, include the largest amount.

Amounts NOT included:


Sec 20-135 Where there has been an earlier disposal of the car for MV
Sec 20-145 You inherited the car
Sec 20-155 Car was let on hire in circumstances set out

Profit Making Undertakings or Plans


Sec 15-15 Assessable income includes profit arising from carrying on or carrying out
of a profit-making undertaking or plan, PROVIDED profit is not:
a) Assessable as ordinary income under s6-5
b) Arises in respect of sale of post-CGT property

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Work in Progress
Sec 15-50 Assessable income includes any WIP progress amounts that you receive.

Royalties
Sec 15-20 Includes as assessable income an amount received as or by way of royalty.
BUT only assessable if:
 Fall within ordinary meaning of ‘royalty’ and
 Not assessable as ordinary income under s6-5.

Ordinary meaning of royalty:


Stanton v. FCT Royalties fall under two heads:
1) Payments which grantees of monopolies such as patents and
copyrights received under licences; and
2) Payments which the owner of the soil obtains in respect of taking
some special thing forming part of it or attached to it which is allowed
to be taken.

Shorter Oxford English a) payment to land-owner for lessee of mine in return for privilege of
Dictionary working it;
b) sum paid to proprietor of patented invention for use of it
c) payment to author, editor, or composer for each copy of a book, piece
of music, etc sold by publisher, or for representation of a play.

McCauley v. FCT Payments received by grantor of a right to remove trees on the basis of
amount of timber cut or removed under a right to do so, the amounts are
receipts ‘as or by way of royalty’.

Royalties assessable under s6-5 (statutory definition):


Sec 6(1); s995-1(1) a) amount paid or credited to the extent it is consideration for:
 use or right to use copyright, patent, design or model, plan,
secret formula or process, trade-mark, or other like property or
right.
 Use or right to use any industrial, commercial or scientific
equipment;
 Supply of scientific, technical, industrial or commercial
knowledge or information
 Supply of assistance that is ancillary and subsidiary to and
is furnished as means of enabling the application or enjoyment of
any of the above items
 Reception or right to receive visual images/sounds
transmitted to public by satellite, cable, optic fibre or similar
technology;
 Use or right to use in connection with TV broadcasting or
radio broadcasting, visual images/sounds, transmitted by satellite,
cable, optic fibre, etc.
 Use or right to use motion picture films, films or video
tapes in connection with TV or radio broadcasting.
Sec 6C b) undertaking that the use, supply or reception of the above items will
not be made to anyone else. Ie. exclusive right.

23
Outbound royalties may be deemed to have a source in Australia.

Insurance Recoveries on Losses of Live Stock


Sec 385-130 Include as assessable income insurance received for loss of live stock, or
loss by fire of tress which are held as assets of a primary production.
Can elect to include 20% of amount in each of the next 5 years.

Gains on Disposal of Traditional Securities


Sec 26BB Includes gain made on disposal of traditional security as assessable
income.

Traditional security:
include bonds, debentures, bills of exchange, deposits with financial
institutions, loans and repayment contracts purchased after 10/5/89 which:
 do not have an eligible return; or
 have an eligible return, but return <1.5% of total payments x no. of
years in term of security.

Assessable gain = consideration received – acquisition cost.


Sec 26BB(3); TR 96/14 Where not dealing at arm’s length:
Where parties are not dealing at arm’s length, the Commnr may apply
arm’s length consideration. Will use discounted cash flow analysis if
there is no established market from which an arm’s length value can be
drawn.

Sec 118-20 CGT will apply:


From 1/7/92, CGT provisions will apply to disposal of traditional
securities which are not trading stock. Any taxable gain will be reduced
to the extent that the gain has been included in assessable income under
s26BB.

Bounty or Subsidy
Sec 15-10 Assessable income includes a bounty or subsidy that:
a) you receive in relation to carrying on a business; and
b) is not assessable as ordinary income under s6-5

Interest on overpayment of tax


Sec 15-35 Interest payable from ATO are assessable

Interest under will, etc


Sec 26(b) Beneficial interests derived under any will, settlement, deed of gift or
instrument of trust.

Bonus
Sec 26(I) Amounts received by way of bonus other than reversionary bonus on
policy of life assurance.

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Recovery of Embezzlement, etc, loss
Sec 26(k); s20-20 & 20-35 Amounts received by way of insurance, indemnity, recoupment, recovery
or reimbursement of losses through embezzlement, larceny, defalcation or
misappropriation by an employee or agent where losses already allowed
as deductions under s71.

Meals provided to clients, etc in In-House dining facilities


Sec 32-70(1) Includes as assessable income $30 for each meal provided in an in-house
dining facility to an individual other than an employee for 97/98 and
subsequent years WHERE a deduction is claimed under s32-30.

Receipts from a film


Sec 26AG Capital and revenue receipts from a film are assessable where taxpayer
has qualified for a Div 10BA deduction for capital investment in a film.

Investment related lottery winnings


Sec 26AJ Assesses value of prize drawn or decided on or after 24/12/91 under an
investment related lottery.
3 elements to determine whether it is an investment-related lottery:
1) prize must be won in a lottery or similar arrangement
2) chance to win must arise due to taxpayer holding an investment with
an investment body
3) betting chance not otherwise taxable.

Dividends
Sec 44(1) All dividends are assessable to a resident shareholder.
NOTE: applies only to dividends received directly. If received indirectly,
assessed under s6-5 or trust provisions of Div. 6-6AAA.

Sec 44(1B) Deems dividends which are distributions on redemption, cancellation or


reduction of capital, and those out of a share premium account, to have
been made out of profit.

Prizes and Awards


IT 167 Prizes which are rewards for regular appearances on radio or television
programs are assessable.

Prizes won incidentally to taxpayer’s income producing activities or


business is assessable. Eg. Kelly v. FCT.

25
Personal Services Income
Section 84-5 Definition – PSI:
Ordinary or statutory income of taxpayer or of any other entity where
income is mainly a reward for his/her personal efforts or skills.
 Only individuals can have PSI
 Can arise if income is for doing work or for producing result
 Even though income payable under contract, does not stop income
being mainly a reward for person’s efforts or skills.

Sec 86-15(2) PSE:


A company, partnership or trust whose ordinary income or statutory
income includes the personal services income of one or more individuals.

Section 84-10 Is individual employee?


Application of the PSI provisions does not imply that the individual is an
employee.

Sec 87-15(3) Is there personal services business?


If 80% or more of individual’s PSI is income from same entity, the PSI is
a PSB:
 When the PSI is gained or produced, a PSB determination is in force
re the taxpayer’s PSI; and
 If the determination was made on application of a PSE, the
individual’s PSI is income from the entity conducting the PSB.

Sec 87-15 If less than 80% of PSI comes from one source, still treated as conducting
a PSB if at least one of the 3 personal services business tests have been
met:

Sec 87-20 1) Unrelated clients test:


a) During the year, the individual or PSE gains or produces income from
providing services to 2 or more entities that are not associates of each
other and are not associates of the individual or PSE; AND
b) The services are provided as direct result of individual or PSE making
offers or invitations (eg. advertising) to the public at large or to a
section of the public, to provide the services.

2) Employment test:
For an individual, test is passed if:
a) the individual engages one or more entities (other than associates of
the entity that are not individuals) to perform the work; AND
b) that entity performs, or those entities perform together, at least 20%
(by MV) of the individual’s principal work for that year.

For an entity, test is passed if:


a) the entity engages one or more other entities to perform work, other
than individuals whose PSI is included in the entity’s income or
associates of the entity that are not individuals; and

26
b) that other entity performs, or those other entities together perform, at
least 20% (by MV) of the entity’s principal work for that year.

3) Business premises test:


At all times during the year, the individual or entity maintains and uses
business premises:
a) at which the individual or entity mainly conducts activities from
which PSI is gained or produced; and
b) of which the individual or entity has exclusive use; and
c) that are physically separate from any premises that the individual or
entity, or any associate of the individual or entity uses for private
purposes; and
d) that are physically separate from the premises of the entity to which
the individual or entity provides services.

Sec 87-55 PSB determination:


With a PSB determination, an individual will be treated as conducting a
PSB. As PSE will be treated as having a PSB if a determination is in
force re an individual’s PSI.

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Exempt Income
Sec 6-20(1) Amount of ordinary income or statutory income will be exempt income if
made exempt by a provision of the Act.

Sec 6-20(2) Ordinary income may be exempt if it is excluded from being assessable
income.

Sec 23(r) Exempts from Australian tax income derived by a NR from sources
outside of Australia.

Sec 23L Employment related benefits which are either fringe benefits or exempt
benefits for FBT purposes are treated as exempt income so far as the
employee is concerned.
Sec 118-12 Capital gains and losses do not arise where there is a disposal of an asset
which was used only to produce exempt income, or which was owned
by a taxpayer whose income is totally exempt.

FCT v. Australian Music Principle of Mutuality:


Traders Association NOTE: principle of mutuality is that a taxpayer cannot derive income
from payments made to himself.
The essential elements of mutuality:
1) when contributions are made to a common pool to meet an
indifferently beneficial objective and excess is returned to
contributors, do not have to invoke the mutuality principle. These
payments are capital.
2) In dealings confined exclusively to members, the entity does not
generate an income amount.
3) If activities are extended beyond the associates, there are dealings out
of which a profit/loss may be made.
4) If a business or commercial venture is undertaken, it does not matter
that the contributors are members of the association.

TD 1999/38 Principle of mutuality does not apply to income derived by registered/


licensed club under an arrangement with an external party to conduct
gaming or other activities on the club’s premises – they are assessable.

TD 93/194 In cases where it is difficult to determine what percentage of income is


from members’ and what is not, the Commissioner allows the use of a
formula (ref. Pg 2-15)
Expenses relating specifically to members are not allowable as a
deduction.

Exempt Organisations
Sec 50-5 Charitable, religious, scientific and educational institutions and
funds.

Sec 50-10 Societies, associations or clubs established for community service


purposes is exempt from tax under s50-1 and 50-10 if the special
conditions in s50-70 are satisfied.

28
Sec 50-15 & 50-1 Exempts income of employer or employee associations registered under
a Cth, State or Territory law relating to settlement of industrial
disputes and trade unions, whether registered or not (as long as they
are located in Aust and incurs its expenditure and pursues its
objectives principally in Aust.

Sec 50-20 & 50-1 Exempts income of friendly societies that are not carried on for purpose
of profit to individual members and satisfy conditions in s50-70.

Sec 50-25 & 50-1 Exempt income of a municipal corporation or a local governing body,
and of a public authority constituted under a Cth law.

Sec 50-30 & 50-1  Income of public hospital that satisfies conditions in s50-55
 Non-profit hospital carried on by a society or association and
satisfying conditions in s50-55
 Medical benefits organisation, health benefits organisation and a
hospital benefits organisation which are registered.
All must not be carried on for purposes of profit.

Sec 50-35 & 50-1 Income of Phosphate Mining Company of Christmas Island Limited
and British Phosphate Commissioners Banaba Contingency
Fund.

Sec 50-40 & 50-1 Non-profit society or association established to promote the
development of aviation or tourism, or agricultural,
horticultural, industrial, manufacturing, pastoral, or viticultural
resources in Australia.

Sec 50-45 & 50-1 Sports, culture, film and recreation – Societies and clubs that are not
carried on for purposes of profit or gain to members and satisfy
conditions in s50-70.

Exempt Amounts
Sec 51-5 Allowance or bounty paid to member of Defence Forces.

Sec 51-10 Payments received under a grant made by the Australian-American


Educational Foundation with the condition that the grant is from
funds made available to the Foundation under the agreement
establishing it.
Also income from CRAFT scheme – Cth Rebate for Apprentice Full-
time Training.

Sec 51-15 Official salary and non-Australian sourced income derived by Governor
General or State Governor. But still assessable on ordinary and
statutory income derived from source in Australia.

Sec 51-25 Mining payments paid to Aboriginals or distributing bodies are exempt
(they are subject to mining WHT under Div 11C Pt III (36 Act))

29
Sec 51-30 Periodic maintenance payments, rental subsidy payments and open
employment incentive bonus are all exempt from tax.
Sec 51-45 Mining payments to Aboriginals or distributing bodies are exempt.

Sec 51-48 Refunds of State or Territory business franchise fees are exempt if subject
to Cth franchise fees windfall tax.

Sec 51-49 Refunds of State taxes paid on Cth places are exempt from tax if subject
to Cth places windfall tax.

Overseas Employment Income


Sec 23AG(7) “Foreign Service”:
Means service in a foreign country as the holder of an office or in the
capacity of an employee.

Sec 23AG Foreign earnings derived after 30/6/87 by an Australian resident engaged
in service in a foreign country for a continuous period of not less than
91 days are exempt, PROVIDING:
 Foreign earnings are not exempt from tax in foreign country; and
 If there is foreign tax liability, the Commissioner is satisfied that it has
been paid or will be paid.

Sec 23AG(2) Exceptions:


Sec 23AG will not apply if the income is exempt from foreign tax solely
because:
 Of a DTA
 The foreign country does not tax employment income; or
 A law or agreement dealing with diplomatic privileges and immunities
applies.

Continuous service:
IT 2441 Services period of 91 days does not have to be measured on a year of
income basis, can overlap year-end.

Sec 23AG(6) Continuity will not be broken by absences due to accident or illness.
Absences on recreation leave does not break it either. EXCEPT where
leave is:
 Attributable to employment other than the foreign service;
 LSL or similar kind
 Leave w/o pay or on reduced pay.

Sec 23AG(6A) to (6E) Provides method to calculate ‘absentee credits’ to determine whether
taxpayer has satisfied the 91 day continuity service period.
PLS 1-163

Sec 23AG(3) Sec 23AG amounts considered when calculating tax payable:
The amount of foreign employment income exempt from tax will be taken
into account in calculating Australian tax payable on other assessable

30
income. [Ref: PLS 1 –163 for formula]

31
Sec 23AG(4) Formula given apportions the deductions between the exempt and non-
exempt income.
NOTE: superannuation deductions and fees paid to prepare Australian tax
returns are NOT apportionable deductions: Norris v. FCT; TD 200/12.

Foreign branch profits


Sec 23AH Foreign branch profits derived by an Australian company from a branch
carried on in a comparably taxed country exempt. Applies to both
income and capital gains.
Conditions:
− Income derived by the taxpayer during the year of income
commencing 1/7/90 or subsequent year
− Foreign income is derived carrying on a business in a listed country or
through a permanent establishment in the listed country
− Broad-exemption listed country – PLS 1 -166
− Foreign income is subject to tax in any listed country in a tax
accounting period.

Non-portfolio dividends
Sec 23AJ Non-portfolio dividends paid to a resident company by a company in a
listed or unlisted country to the extent that it is an ‘exempting receipt’
– exempt.
NOTE: PLS 1 -170.

32
ALLOWABLE DEDUCTIONS
GST Implications
Sec 27-1 to 27-30  Exclude GST from deductible amounts to extent of entity’s ITC
entitlement or decreasing adjustment (s27-5).
 Deduction for increasing adjustments due to changes in creditable
purpose of the acquisition (other than for adjustments relating to an
increased use of the item for private or domestic purposes) (sec 27-10)
 Deduction for increasing adjustments on cessation of entity’s GST
registration as long as the assets is still held for income-producing
purpose (s27-10(3)).
 Exclude GST from amounts considered in calculating deductions
 Deny deduction for GST payments (s27-15)
 Exclude ITC entitlements from outgoing incurred before 1/7/00.

33
Business Deductions
Sec 8-1(1) You can deduct from assessable income any loss or outgoing to the extent
that:
 It is incurred in gaining or producing assessable income (all
taxpayers); or
 It is necessarily incurred in carrying on a business for the purpose of
gaining or producing assessable income (business taxpayers)

Sec 8-1(2) You cannot deduct a loos or outgoing to the extent that:
 It is a loss or outgoing of capital, or of a capital nature;
 It is a loss or outgoing of a private or domestic nature;
 It is incurred in relation to gaining or producing exempt income;
 A provision prevents you from deducting it.

FCT v. Snowden & Necessarily Incurred:


Willson Ltd Necessarily incurred does not mean that the outgoing must be unavoidable
or logically necessary. It means clearly appropriate or adapted for the
ends of business. It is depended upon the exercise of reasonable
commercial judgement.

Incurred:
FCT v. James Flood Pty It is not necessary for an actual disbursements to have been made for a
Ltd liability to be incurred. All that is required is that the taxpayer is
definitively committed, or has completely subjected itself to, the
expenditure.
Even though the amount cannot be precisely determined as long as it is
capable of reasonable estimation. (also RACV Insurance Pty Ltd v. FCT)

FCT v. Raymor (NSW) Actual payment of an amount during the year will result in the amount
Pty Ltd being ‘incurred’ in that year.

New Zealand Flax Does not include expenditure which is no more than impending,
Investments Ltd v. FCT threatened or expected.

Coles Myer Finance Ltd v. Where taxpayer has not physically discharged the liability, the amount
FCT; TR 97/7; TR 94/26 will still be incurred provided:
 There is a presently existing liability;
 The loss or outgoing which arises as a consequence of that liability is
of a revenue character; and
 All or part of the loss or outgoing is properly referable to the particular
year in question.

FCT v. James Flood Pty An amount may be incurred even though the debt is defeasible.
Ltd

Coles Myer Finance Ltd v. The expense should be properly referable to the revenue – ie. the period
FCT of time during which the benefit from incurring the loss or outgoing is put
to profitable advantage.

34
Nexus with Assessable Income:
Lunney v. FCT Outgoings must have the ‘essential character’ of an outgoing incurred in
the process of deriving assessable income.

Ronpibon Tin NL; Outgoing must be ‘incidental & relevant’ to gaining assessable income.
Fletcher & Ors v. FCT

AGC; Placer Pacific; TR Outgoings after business has ceased: In order for the outgoing to be
2000/D3 deductible, the occasion of the outgoing must be found in those income
earning activities (ie. is the loss still incurred in relation to the income
earning activities? Taxpayer bound to pay liabilities after the fact which
arose due to the activities)

FCT v. Brown Where taxpayer incurred unavoidable costs arising out of transactions
entered into in the course of business, these costs will still have the
necessary nexus after the business has ceased.

TR 2000/D3; Steele’s case Outgoing before business commences: Outgoings and losses will be
deductible provided:
 They were not incurred ‘too soon’, ie. not preliminary to the income
earning activities
 Expense is not private or domestic
 Period of outgoings prior to derivation of relevant income is not so
long, taking into account the kind of income earning activities
involved, that the necessary connection between outgoings and
income is lost.
 Expense incurred with the view of gaining or producing assessable
income
 Continuing efforts are undertaken in pursuit of that end.
Commr of IR (NZ) v. The Commissioner’s concern is only that the necessary nexus to the
Europa Oil (NZ) Ltd production of income exists. As long as it exists, it is irrelevant that it was
extravagant or could have been done in a less costly manner. The
Commissioner must accept the decisions made by the taxpayer even if the
expenses were incurred with poor judgement.

Capital Nature:
British Insulated & Helsby Enduring Benefit test: if an expenditure is made once and for all and
Cables Ltd v. Atherton with a view of bringing into existence an asset or an advantage for the
enduring benefit of a trade, it will be capital.

NAB Ltd v. FCT Once and for all test: capital expenditure is a thing that is going to be
spent once and for all. Income expenditure recurs every year.

Sun Newspaper Ltd v. Business entity test: Expenditure in establishing, replacing and enlarging
FCT the profit yielding structure is capital. There needs to be 3 elements:
 The character of the advantage sought – is it a fixed capital asset or an
enduring benefit for the organisation or profit earning subject that is

35
sought? Or is it in the nature of circulating capital, turned over or
consumed in running the business?
 The way in which the asset or advantage is used – is it an element in
the profit yielding structure or part of the profit earning process?
 How was it acquired – by capital or revenue payments.

Mansfield v. FCT; FCT v. Private or Domestic Nature:


Edwards Need to look at the ‘essential character’ of the expenditure. Expenses
which appear to be essentially private in nature, may be deductible if it is
excessive or occasioned by the specific working conditions o the taxpayer.

Child minding expenses by employee or self-employed person is a private


Jayatilake v. FCT and domestic cost.

36
Some Specific Items Deductible Under s8-1
Travel Expenses
Payne v. FCT Allowed deduction for travel if part of the business is conducted at the
taxpayer’s residence and travel is from that place to another place
where the business is being carried out.

S26-30 Deduction denied for accompanying relative unless:


− During the trip , the relative performs substantial duties as employee
of the taxpayer, or, the taxpayer’s employer
− It is reasonable to conclude that the relative would still have gone on
the trip even in the absence of the personal relationship with the
taxpayer

S26(3) Where expenses are incurred in providing a fringe benefit, they are
deductible in full

Case R2 84 ATC Costs can be apportioned on a marginal basis, rather than 50/50

Trips partly for pleasure


Case R13 84 ATC Proper method is to determine the degree of predominance to be
attached to the objects or purposes in the pursuit of which the taxpayer
incurred the particular expenditure which is the subject of the
apportionment.
Trading stock
S8-1, s70-15 Deductible under s8-1, however is not allowable until the income year
that the taxpayer has taken the trading stock into account as stock on
hand or the year in which the taxpayer includes an amount in assessable
income in connection with the disposal of stock.
Interest Expenses
Purpose of the borrowing:
Sec 8-1 Interest may be deductible where funds have been applied for purpose of
gaining or producing assessable income or the borrowing is necessarily
incurred in carrying on a business to produce assessable income.
(if the outgoing for which interest was incurred is deductible, then
interest is deductible)

Ure v. FCT; TR 95/25 The test of deductibility requires looking at the essential character of the
interest. Look at:
 Character of taxpayer’s undertaking or business;
 Objective purpose of the borrowing;
 Nature of the transaction or series of transaction of which the
borrowing of funds is an element
 Subject purpose (sometimes)

Sec 8-1; IT 2661 Apportionment required:


Where borrowing used partly for income producing purposes, the
interest expense is deductible only to the extent to which the funds have
been used for that purpose.

37
TD 93/13 Choice of property used for security irrelevant:
Interest incurred on loan to acquire an income producing property is
fully deductible even though loan is secured over non-income producing
property – eg. family home.

Acquisition of income producing property:


Travelodge Papua New Interest on money borrowed to construct an income producing asset is
Guinea Ltd v. Chief deductible even when interest is paid during construction period and no
Collector of Taxes revenue is received. BUT there must be no doubt that the asset is being
constructed solely and exclusively for the purpose of producing
assessable income.

Steele’s case Where funds have been used to acquire capital assets, the fact that the
cost of the asset is not deductible under s8-1 does not mean that the
interest is not deductible. If the asset is used for income producing
purposes, the cost of the asset is capital, but the interest payments are
recurrent revenue items.

TR 2000/D3 Interest before income derived: Interest incurred in a period prior to


the derivation of income will be outgoings incurred in gaining or
producing assessable and therefore deductible if:
 They were not incurred ‘too soon’, ie. not preliminary to the income
earning activities
 Expense is not private or domestic
 Period of outgoings prior to derivation of relevant income is not so
long, taking into account the kind of income earning activities
involved, that the necessary connection between outgoings and
income is lost.
 Expense incurred with the view of gaining or producing assessable
income
Continuing efforts are undertaken in pursuit of that end.

Where business ceases or asset is disposed of:


Brown v. FCT; TR 2000/D3 If interest has been incurred over a period after the relevant borrowings
or the relating asset has been lost, it will still be an outgoing ‘incurred in
producing assessable income’ if the occasion of the outgoing is to be
found in whatever was productive of the assessable income of an earlier
period. This requirement is satisfied if:
 Funds were borrowed for an income earning purpose and not used
for any other purpose; and
 Taxpayer has no legal entitlement to repay the principal and as a
result, is saddled with an unavoidable stream of interest outgoings.

IT 2661; FCT v. Carberry Asset for private and business use:


If an asset is acquired which has both income producing and private use,
then interest cost still wholly deductible if taxpayer can demonstrate that
private funds have been used to meet the cost of the private component,
ie. the borrowings relate solely to the part of the asset acquired for

38
business use.

Borrowing to repay partnership capital (refinancing principle):


FCT v. JD Roberts; FCT v. Where a partnership is carrying on a business, if the partnership borrows
Smith to refund partnership capital to the partners (where capital represents
moneys originally advanced by the partners, undrawn profit
distributions, loans to the business) interest on the borrowings will be
deductible.
HOWEVER, interest will not be deductible if the borrowing is used to
replace partnership capital which is represented by internally generated
goodwill or an unrealised revaluation of assets as they do not represent
refund of moneys previously invested.

Interest on borrowings exceeds return on investment:


Ure v. FCT; Fletcher v. FCT If borrowing is partly for purpose of producing income and partly for
non-allowable purposes, can apportion by limiting the taxpayer’s
deduction for interest to an amount equal to the amount received from
his investment of the borrowed money.
(eg. if rent property out to relatives at below arm’s-length price, then
interest deduction is only limited to the proportion of investment you get
from your loan, ie. apportion the deduction to the rent you now receive).

Interest on borrowing to make superannuation contributions:


IT 2678 Interest incurred by an employer in borrowing funds to make super
contributions to provide benefits for its employees is deductible.

Sec 67AAA Financing costs (incl. interest) re loans or other financing arrangements
entered into after 18/8/92, where moneys were used to make super
contributions otherwise than on behalf of employees not deductible.

IT 2606 Interest on borrowings to fund share acquisition:


There must be a connection between the incurring of the interest and:
 Activities of taxpayer which do or are expected to produce
assessable income; OR
 Business of taxpayer being a business carried on for purpose of
earning assessable income.

IT 2582 Interest on borrowings to pay tax:


Deduction is only available to business taxpayers. There is a connection
between carrying on the business and borrowing the money.

Penalty interest payments:


FCT v. Marbray Nominees Penalty interest for early repayment of loan is deductible if the penalty
Pty Ltd. interest has been paid to alleviate the obligation to pay interest on part of
the loan.

Sec 25-5(1)(c) Interest payments to the ATO:


Interest charged by the ATO under s170AA (interest where assessments
are amended to increase tax payable) and s207A (interest for late
payment of tax) is deductible from 1/7/92

39
Ilbery’s case Prepayment for interest denied where the dominant purpose was to
reduce tax and for no other purpose
Damages and Penalties
Herald & Weekly Times v. Damages and costs incurred were inseparable from the income
FCT producing activity and the thing which produced the assessable
income was the thing that exposed the taxpayer to the liability
which was discharged by the expenditure – therefore deductible.

Magna Alloys Pty Ltd v. Damages and penalties paid in connection with the way the business is
FCT conducted is deductible.

Sec 26-5 Prohibits deduction for any penalty or fine imposed by law.

Payments and Benefits provided to employees


Sec 8-1 Salary and Wages:
Salaries or wages, bonuses, gratuities, allowances or other compensation
or rewards for personal services paid is deductible to the extent to
which they are incurred in producing the taxpayer’s assessable
income.

Retiring allowance:
Sec 8-1 A retiring allowance, whether in lump sum or pension form and whether
paid to an employee or associates, is deductible ONLY if it can be
shown to be in the future interests of the business (eg. to promote greater
efficiency or economy in the carrying on of the income producing
activities).

Sec 25-50 Pensions, gratuities or retiring allowances paid to employees or


dependants are deductible IF they are paid in good faith in consideration
of the employee’s past services.

Excessive remuneration:
Sec 26-35 If taxpayer makes a deductible payment to a relative or to a partnership
in which he/she is a partner, the taxpayer can only deduct a reasonable
amount.

Long service leave, annual leave


S26-10 Deductible allowed for the year that the payment is MADE, not when
the provision is raised.

Director’s fees and bonuses


Merrill Lynch International Discretionary bonuses are not incurred until a quantifiable legal liability
to pay them to individual employees has arisen, even though there was
not real doubt that some sort of bonuses would be paid.
Foreign Exchange Losses
Sec 8-1 Foreign exchange loss is deductible when realised and if incurred in
producing assessable income AND the amount is not of a capital
nature.

40
Forex losses of a capital nature may be deductible under Div 3B, Part III
(ITAA 97).
Sec 82Z
Currency exchange loss incurred by a taxpayer in a year of income
under an eligible contract is an allowable deduction in that year of
income.

Expenses on Commencement and Cessation


Establishment:
Softwood Pulp & Paper Expenses associated with the purchase or establishment of a business
case generally incurred too soon to be regarded as being incurred in the course
of business – not deductible.

Cessation:
Payments incurred in closing down business not deductible.

Sec 25-50 Retirement payments made as compensation on closing down of business


not allowed under s8-1 but may be under s25-50 if made in good faith and
in consideration of past services of employee.

41
Deductions Under Specific Provisions
Repairs
Sec 25-10(1) Can deduct expenditure incurred for repairs to premises or plant which
was held or used solely for purpose of producing assessable income.

Sec 25-10(2) Can only deduct expenses to the extent that it relates to the property or
plant being held or used for income producing purposes.

TR 97/23 What is ‘repair’?


Ordinary meaning taken to be to ‘restore to good condition, to renovate or
mend by replacing or refixing parts.
Involves restoration of a thing to its former condition w/o changing its
character.
Involves restoration of the use and function of the item, not just
appearance.
Item does not need to be in serious state of disrepair – repairs can be
undertaken in anticipation of defects.
It only replaces a part of something which is already there but has been
worn out.

W Thomas & Co Pty Ltd Repair involves restoration of a thing to its former condition without
v. FCT changing its character.

Repairs of capital nature


TR 97/23 Repairs will be of capital nature if:
 Expenditure is incurred in establishing, replacing or enlarging the
profit-yielding structure
 Expenditure is for work that is a renewal in the sense of a
reconstruction of the entirety.
 Initial repairs.

Lindsay v. FCT; A repair which constitutes replacement of the entirety is not a repair.
Rhodesian Railways Ltd v.
ITC; WG Thomas & Co
Pty Ltd v. FCT

Improvements:
FCT v. Western Suburbs Improvements go beyond restoration of original use and function of item
Cinemas Ltd and so are NOT repairs. If enhances the item beyond original function
and use, then improvement. Key factors:
a) whether thing replaced or renewed was major and important part of
the structure of the plant, premises
b) whether work done did more than meet need for restoration of
efficiency and function
c) whether thing was replaced with new and better one;
d) whether new thing has considerable advantages over the old one,
including advantage that it reduces likelihood of repair bills in future.

Law Shipping Co .v IRC; Initial repair:

42
WG Thomas & Co Pty Ltd Where item subjected to a repair is acquired in condition that requires
v. FCT repair prior to use is considered as part of the cost of acquisition, not a
cost of maintenance.
[NOTE: informal ATO measure of initial repair is repair done within 12
months of acquisition.]

Odeon Associated IF, expenditure incurred for initial repairs where repairs are effected
Theatres v. Jones subsequently to an item in workable but poor condition – deductible.
BUT if incapable of being put to commercial use without immediate
repair, then capital.

TD 98/19 Initial repair expenditure may be included in the cost base of the asset for
CGT purposes under s110-25(5) or 110-55(2).

TR 97/23 Notional repairs:


Repair does not necessarily change because it is carried out at the same
time as an improvement. BUT need to reasonably quantify the costs.

Repairs after cessation of use:


IT 180; TR 97/23 Expenditures on repairs carried out to premises, plant, etc after cessation
of a taxpayer’s business is deductible, PROVIDED:
a) need for repairs can be related to period during which the property or
item was used for purpose of producing income;
b) property or item had been used for purpose of producing assessable
income at some time during the year in which expenditure was
incurred.

Payment for non-compliance with a covenant to repair


Sec 25-15 Can deduct amount paid for failing to comply with lease obligation to
make repairs to premises which you use for producing income.
Conditions to be satisfied:
 taxpayer must be obliged under the terms of a lease by covenant to
make repairs to premises.
 Taxpayer must have failed to comply
 Taxpayer must pay an amount as a consequence of failing to comply
 Taxpayer must have used or use premises for income producing
purposes.

Bad Debts
Sec 25-35(1) Can deduct a debt written off as bad in the income year if:
 The debt is written off in the income year in which the deduction is
claimed; AND
 The bad debts have been brought to account by the taxpayer as
assessable income of any year; OR
 Debts are in respect of money lent in the ordinary course of taxpayer’s
business of money lending.

43
Conditions:
Point v. FCT; GE Crane  Debt must have existence, as a legal or equitable claim.
Sales Pty Ltd v. FCT  Must be ‘bad’.
 Must be written-off in the year claimed.

TR 92/18 When is a debt ‘bad’?


a) when debtor has died, leaving no or insufficient assets to satisfy debt
b) where debtor cannot be traced and creditor does not know any assets
against which action can be taken
c) debt is statute-barred and debtor is relying on this defence for non-
payment
d) debtor is company – it is in liquidation or receivership and there are
insufficient funds
e) on an object view of facts or probabilities existing at the time, there is
little or no likelihood of debt being recovered.

Point v. FCT Written off:


Debt must be physically written off as bad during the year when it
becomes bad. No need for formal writing off, but some form of written
particulars are required.
Not sufficient for debt to be recorded as bad when preparing yearly
accounts.

Sec 20-30 Recoupment of bad debt:


Any recovery of amounts written off as bad debts in a previous year must
be included in the taxpayer’s assessable income.

Sec 165-120 Change of ownership:


 If debt incurred in earlier year – coy has same owners and control
throughout the period from day on which debt was incurred to end of
income year in which it writes of debt as bad.
 If debt incurred in current year – same owners and same control
during the income year both before and after debt incurred.
If fail the test, can go to same business test (sec 165-129(2)).

Borrowing costs
Sec 25-25(1) Expenses incurred in borrowing money for income producing purposes
are deductible over term of loan or 5 yrs, whichever is shorter (per
s25-25(5)).

S25-25(3) Apportionment:
If borrowing is only used partly for purpose of producing assessable
income, the deductible amount is based on proportion of funds used for
income producing purpose.

Sec 25-25(4) Method statement:


For working out the maximum amount you can deduct in one year (ref pg

44
2-80)
Sec 25-25(6) Cost less than $100 per year:
If borrowing expenses incurred in any one year does not exceed $100,
they are deductible in that year.

PLS 2-81 Accounting treatment of Expenses of Borrowing


Mortgage Discharge Expenses
Sec 25-30 Payments (not principal and interest) incurred to discharge a mortgage
given as security for moneys borrowed are deductible as long as
either the money or the property purchase was used for income-
producing purposes.
TR 93/7
Expenses incurred in discharge of a mortgage would include penalty
interest for early repayment of loan.

Apportionment:
Sec 25-30(3) Where money or property was only partly used to produce income, the
deduction will be apportioned.

Expenses relating to lease documents


Sec 25-20 Outgoing incurred in connection with:
 Preparation of lease;
 Registration or stamping of lease;
 Assignment or surrender of lease
Are deductible PROVIDED the leased property was used for income
producing purposes.

Sec 25-20(a) & (b) Apportionment:


If leased property partly used for income producing purposes, apportion
the deduction.

Expenses relating to granting of patents


Sec 68A Expenditure in connection with obtaining or seeking to obtain grant of a
patent, registration of a copyright or design, extension of term of a
patent or registration period for a design – deductible, PROVIDED
that the patent, copyright or design is used for assessable income
producing purposes.

Pensions, Gratuities and Retiring Allowances


Sec 25-50 Allows deduction for amounts paid by taxpayer as pensions, gratuity or
retiring allowance to an employee, former employee or their
dependants. BUT only deductible if payment made in good faith and
in consideration of employee’s past services in the business carried
on for the purpose of producing assessable income.

Sec 25-30(3) Section will not apply if some other provision applies to allow deduction,
eg. s8-1.

Sec 26-55 Deduction under s25-50 not allowed if it will result in the taxpayer

45
carrying forward a tax loss.

46
Tax related expenses
Sec 25-5(1) Can deduct expenditure relating to:
 Managing tax affairs
 Complying with an obligation imposed by a Cth law re tax affairs of
an entity
 Interest under s170AA – underpayment of tax or s207A – late
payment of tax.

TD 2003/10 Tax consolidation expenditure


Head company can deduct valuation fees
Consolidation fees are deductible under s25-25

Subscriptions
Sec 25-55 Can claim a deduction for subscriptions to a trade, business or
professional association where section 8-1 does not apply.
Claim is limited to a max. of $42.

TR 2000/17 If you can claim under s8-1, it is not limited to $42. This will also not
count towards your $42 limit.

Costs associated with meeting GST obligations


Division 27 Effect of GST on tax deductions:
Exclude GST from deductible amounts to extent of entity’s ITC
entitlement or decreasing adjustment (s27-5).
 Deduction for increasing adjustments due to changes in creditable
purpose of the acquisition (other than for adjustments relating to an
increased use of the item for private or domestic purposes) (sec 27-10)
 Deduction for increasing adjustments on cessation of entity’s GST
registration as long as the assets is still held for income-producing
purpose (s27-10(3)).
 Exclude GST from amounts considered in calculating deductions
 Deny deduction for GST payments (s27-15)
 Exclude ITC entitlements from outgoing incurred before 1/7/00

TR 1999/12 What is deductible:


Some expenses incurred in preparing for GST are deductible as revenue
outgoings, eg. stationery, professional advice, staff recruitment and
training.
The cost of software and other plant such as computers are depreciable
(unless the expenditure is <$300 or effective life is <3 years, which means
immediately deduct).

Sec 25-80 Small to medium sized businesses (ie. turnover <$10m) that are registered
for GST before 1/7/00 are entitled to an immediate deduction for the cost
of acquiring or upgrading plant or software between 1/7/99 and 30/6/00 to
meet GST obligations. Must be installed and ready for use before 1/7/01.

47
Legal Expenses PLS 2 -66
S25-25 Certain borrowings of money –deductible
S25-30 Discharging of certain mortgages
S25-20 Preparation of leases
S86A Grant of registration or extension of patents, designs and copyrights
Hallstroms Pty Ltd Need to consider the reason for which the legal expenses were incurred
(not the end result – eg. may put you out of business, but if it was
incurred to defend something arising out of day to day operations,
then deductible).

Magna Alloys & Research


Pty Ltd v. FCT Need to ID the advantage for which the expenditure incurred and the
manner in which it is to be relied upon or enjoyed.

Capital or Income?
Magna Alloys & Research Legal expenses which arise out of activities in the ordinary day to day
Pty Ltd v. FCT business operations will generally be on revenue account and deductible
under s8-1.

John Fairfax and Sons Pty Where expenses relate to the profit yielding structure of the business, the
Ltd v. FCT outgoings will be capital in nature and not deductible.

FCT v. Snowden & Even where the legal fees arise because of an unusual set of
Willson Pty Ltd circumstances, if they relate to the manner in which the business is
conducted, they will be deductible.
Expenditure incurred to vindicate business methods is properly to be
regarded as being on revenue account.

TR 2000/5 Legal costs re hiring staff and establishing employment agreements are
deductible, UNLESS it is part of setting up the business. Outgoing for
legal expenses in resolving employment disputes are deductible.

Gifts, Pensions
Division 30 (97); s78 (36) All taxpayers can deduct individual gifts of $2 or more made during the
year to certain nominated funds, institutions or bodies or classes of
them.

Sec 30-15 Conditions:


 Gift must not be made by will
 Gift must be $2 or more (in money or property)
 If property is given, must have been purchased by taxpayer <12
months before gift is made AND the deductible amount is the lesser of
the cost price of the property or its value at the time it is given.
 Recipient of the gift must be in Australia (incl. Norfolk, Cocos and
Christmas Islands).
FCT v. McPhail The property must be transferred voluntarily to the donee and not as a
result of any contractual obligation and the transferor must not receive by
way of return any advantage of a material character.

48
Sec 30-200 Valuation of property gift:
Valuations must be in writing and must state the estimated value of the
property at the time the gift was made OR provided that the valuation is
made within 90 days of gift, the value at time of valuation.

Sec 30-15 National Heritage:


Gifts of property of National Heritage significant made to National Trust
bodies are deductible in same way as gifts of art.
HOWEVER, the property must be listed in Register of National Estate at
time gift is made and is accepted by the National Trust for the purpose of
preserving the property for benefit of the public.

Political parties:
Sec 30-15, item 3; TD Deduction allowable for gift to a Registered Political party as long as the
92/114 taxpayer is not a company. This includes membership subscriptions.

Sec 30-15, item 3 Annual limit for deductions for political party donations is $100.

Loss on Disposal or Redemption of traditional securities


Sec 26BB(1) Definition:
Security acquired after 10/5/89 that is not trading stock and under which
the total payments, other than periodic interest, will not exceed issue price
by more than 1.5%.

Sec 70B(2) Where taxpayer disposes of a traditional security or redeems it, the
amount of any loss on disposal or redemption is deductible.

Sec 70B(3) Non-arm’s length disposal/redemption:


The Commissioner may deem the consideration for the disposal to be
equal to market value.

TR 96/14 In determining arm’s length consideration, a discounted cash flow


analysis will be used where there is no established market from which the
arm’s length value can be ascertained.

Debt/Equity Swaps
Sec 63E(3) Where taxpayer has outstanding debt due from debtor which is a
company, trading trust or public unit trust, an allowable deduction
may arise where taxpayer agrees to extinguish debt in return for non-
redeemable shares or units in debtor.
Deduction is allowable for the swap loss where the debt is greater than the
equity value of the shares or units.
[NOTE: debt forgiveness issues]

Payments to Related Entities


Sec 26-35 Where business makes payment to a related entity, taxpayer only
permitted to deduct so much of amount as the Commissioner deems
reasonable.
IF amount is not deductible here, it will neither be assessable income or

49
exempt income in hands of recipient: s26-35.

Sec 26-35(2)(b) What is a related entity?


A relative of taxpayer, or ptsp in which a relative of the taxpayer is a
partner.

Sec 995-1 or s6(1) For a person:


 The person’s spouse
 Parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal
descendant or adopted child
 The spouse of listed persons

For a partnership:
 Relative of a partner
 Director/shareholder of a company that is a partner
 Relative of a director/shareholder of a coy that is a partner
 Beneficiary of a Trust that is a partner or a relative of such B
 Another ptsp if partner in this other partnership is a relative of a
partner in the first partnership.

Loss by Theft or Embezzlement


Sec 25-45 Deduction allowed for theft, stealing, embezzlement, larceny, defalcation
or misappropriation by agents or persons employed by taxpayer,
where:
 There has been a misappropriation of money, not property
 Money must have been included in taxpayer’s assessable income
 Losses have been sustained through employees or agent other than an
individual you employ solely for private purposes; or
 Deduction only available once loss has been ascertained.

Expenditure on Research and Development


Sec 73B(10) Deduction to eligible companies re expenditure on eligible R&D
provided:
 Coy is registered under s39J of Industry R&D Act 1986 re activities;
 Coy is registered under s39P of same act re projects comprising or
including R&D activities.

Sec 73B(1) Definition of R&D

Sec 73B(2C) Exclusion of certain activities as R&D activities

Deduction factor:
Sec 73B(14) If total R&D expenditure exceeds $20,000, the deduction acceleration
factor is 125% for eligible R&D expenditure incurred after 20/8/96.

Sec 73B(14A) Interest incurred after 23/7/96 in financing R&D activities is deductible at
100% and not 125%.

50
Sec 8-1 Deduction under s8-1
Expenditure on R&D may be deductible under s8-1 if it is both relevant
and incidental to the income producing activities of the business and is not
of a capital nature (eg. high-tech industries or R&D on products which are
trading stock of business).

Mains Electricity Connection


Subdiv. 387-E Deduction allowable for capital expenditure in connecting mains
electricity to a property on which a business is carried on or in
upgrading existing connection to such property – for 97/98 &
subsequent years.

Sec 387-355 Deduction is allowable in equal instalments over 10 years.

Sec 387-360 Expenditures which are qualifying expenditures:


Refer p4-37

Loss from Profit-Making Undertakings or Plans


Sec 25-40(1) Deduction for loss arising from the carrying on or carrying out of a profit-
making undertaking or plan IF any profit from the plan would be
included in the taxpayer’s assessable income.

Sec 25-40(2) EXCEPTION – cannot deduct if loss arises in respect of sale of property
acquired after 20/9/85.

Superannuation Contributions
Sec 82AAC(1) Where:
a) a taxpayer makes a contribution to a fund for the purpose of making
provision for super benefits payable for an eligible employee; AND
b) the fund is a complying superannuation fund
the amount is deductible
NOTE: the contributions must actually be made, cannot be merely set
aside.

Environmental Impact Expenditure


Sec 400-15(1) Deduction for expenditure incurred in carrying out an environmental
impact activity ‘for the sole or dominant’ purpose of evaluating the
impact on the environment.

Sec 400-15(2) CANNOT deduct expenditure incurred for purpose of determining


economic feasibility of project.

Sec 400-20(1) Limits on deductibility:


 no deduction allowed for expenditure which are deductible under
another provision of the act
 no deduction allowable for expenditure taken into account in
calculating depreciation deductible under Div. 42.

51
Environmental Protection Expenditure
Sec 400-55 Deduction for expenditure incurred for sole or dominant purpose of
carrying on an environmental protection activity.

Sec 400-65(1) Non-deductible amounts – ref p 4-47

Sec 400-60 What is “Environmental Protection Activities”? – ref p 4-47

52
Commercial Debt Forgiveness
[Refer to Companies section for Companies debt forgiveness]
Sec 245-25 What is a commercial debt?
Commercial debt if interest payable on the debt is, was, or will be an
allowable deduction to the debtor.
Where interest is not payable, the debt will be commercial debt where,
had interest been charged, it would have been deductible.

Sec 245-35 When is debt forgiven?


A debt is forgiven if the debtor’s obligation to pay the debt, or any part of
it, is released or waived or is otherwise extinguished.
5 circumstances where there is commercial debt forgiveness:
1) forgiveness by release, waiver or extinguishment of debt
2) forgiveness where recovery of debt is statute barred
3) in-substance forgiveness
4) forgiveness arising from debt parking
5) forgiveness arising from in substance debt-for-equity swaps

Sec 245-40 DOES NOT APPLY if forgiveness effected under will or an Act relating
to bankruptcy or for reasons of love and affection

Sec 245-75(1) What is the gross forgiven amount?


Gross forgiven amount = Notional Value – Consideration.
[Refer p 2-104 for explanation of each value]

Sec 245-85 Net forgiven amount:


Reduce gross forgiven amount by:
 amount that has been or will be included in debtor’s assessable income
 amount by which a deduction that would otherwise be allowable has
been, or will be, reduced; and
 amount by which the cost base of any asset of the debtor is reduced.

Div 245-105 Application of net forgiven amount to reduce:


“Net forgiven amount” of a commercial debt can be applied, in order, to
debtor’s ‘reducible amount’:
 deductible revenue losses per s2450-110
 deductible net capital losses of prior years before forgiveness year per
s245-125
 ‘deductible expenditure’ eg. scientific research, Australian films per
s245-140
 cost bases of certain assets per s245-165

53
Non-Deductible Expenses
Expenditure related to a capital gain
Sec 51AAA Where expense would not have been deductible but for the capital gain
being included in assessable income, the expense is not an allowable
tax deduction.

Taxes, charges, penalties or fines


Sec 26-5 Penalties and fines payable under the law of the Cth, a State or Territory,
an authority of one of these or a foreign country are not deductible.

Sec 26-20 Charges related to HECS are not deductible except where HECS
payments constitute the provision of a fringe benefit: s26-20(2)

Sec 26-60 Superannuation Contributions Surcharge not deductible

Sec 26-65 Termination payments surcharge not deductible

Sec 51(8) Late lodgement component of levy charged for Superannuation


Supervisory Levy not deductible.

Sec 51(9) Deduction not allowable for Superannuation Guarantee Charge.

Club Fees and Expenditure Relating to Leisure Facilities


Sec 26-45(1) Taxpayer cannot deduct outgoing if incurred to obtain or maintain,
whether for the taxpayer or someone else:
 membership of a recreational club; or
 rights to enjoy facilities provided by a recreational club for the use or
benefit of its members.

Sec 26-45(2) What is a recreational club?


Company established or carried on mainly to provide facilities, for the use
or benefit of its members, for drinking, dining, recreation or
entertainment.

Sec 26-50(1) Taxpayer cannot claim deduction for costs to:


 acquire ownership of a leisure facility or boat; or
 acquire retain ownership of a leisure facility or boat; or
 acquire rights to use of a leisure facility or boat; or
 retain rights to use of a leisure facility or boat; or
 use, operate, maintain or repair a leisure facility or boat; or
 in relation to any obligation associated with ownership of a leisure
facility or a boat; or
 in relation to any obligation associated with right to use a leisure
facility or a boat.

54
Sec 26-50(2). What is a leisure facility?
Land, building or part of a building or other structure, used for holidays or
recreation.

Sec 26-50(3) EXCEPT: if at all times during the year, the facility is held:
 for sale in ordinary course of business of selling leisure facilities; or
 mainly to provide it:
 in ordinary course of business of providing leisure facilities
for payment; or
 produce income in nature of rents, lease premiums, licence
fees or similar charges; or
 for employees to use; or
 for care of employee’s children.
Sec 26-50(5)
EXCEPT: for a boat, deductions available, if at all times during year, it is:
 held as trading stock in ordinary course of business;
 used mainly for letting it on hire in ordinary course of business;
 used mainly for transporting for payment in ordinary course of
business;
 used for a purpose that is essential to the efficient conduct of a
business carried on by taxpayer.

Entertainment Expenses
Sec 32-5 If outgoing or loss is incurred in respect of providing entertainment, it is
NOT deductible under s8-1.

Subdiv. 32-B EXCEPTIONS:


Some entertainment expenses may be deductible if they come under an
exception: Refer p 4-59.

Sec 32-20 Where entertainment expenditure is incurred in providing fringe benefits,


it is fully deductible.
DOES NOT apply to the extent that the taxable value of FB is reduced
under s63A of the FBTAA.

Sec 32-10(1) What is entertainment:


a) entertainment by way of food, drink or recreation; or
b) accommodation or travel to do with providing entertainment by way
of food, drink or recreation.
It will still be entertainment even if business discussions or transactions
occur.

TR 97/17 Factors to consider:


a) why is the food and drink being provided? If for purpose of
refreshment, then not entertainment. If provided in social situation,
then entertainment
b) what food and drink is being provided? Biscuits for coffee or tea vs.
hot sit-down meals

55
c) when is the food or drink being provided? If provided during work
time, overtime or while travelling, less likely to be entertainment.
d) Where is the food or drink being provided? On employer’s business
premises, usual workplace of the employee OR some function room,
hotel, restaurant?

Where employee travelling in the course of performing employment


duties and consumes food and drink, the food and drink provided without
any supplementary entertainment is NOT entertainment.

IT 2675 Light meals are not within the entertainment provisions if only
sandwiches or other ‘hand food’, salads, orange juice are provided and
consumed on taxpayer’s premises.
Sec 32-15 Property used for entertainment:
Where property used for purpose of, or in connection with, the provision
of ‘non-deductible entertainment’, property will be taken as not being
used for purpose of producing assessable income to the extent it is
provided for entertainment.

Sec 32-75 Safeguard provision:


Where:
a) a taxpayer incurs loss under an arrangement;
b) someone provides entertainment under the arrangement to the
taxpayer or someone else; and
c) s32-5 would have prevented loss being deducted
the taxpayer will be treated as if he/she had incurred the loss in providing
the entertainment to the extent that the Commissioner thinks reasonable.
This means that taxpayer cannot deduct these costs.

Employee car expenses


Sec 51AF Expenses paid by employee after 1/7/86 re cars provided by employers for
their own use where there is an entitlement to use the car for private
purposes are NOT deductible.

Expenses incurred by employees will be considered in determining the


taxable value of the car FB.

Travel expenses of an eligible relative


Sec 26-30(1) No deduction for travelling costs of a relative of a person where the
relative performed none or minor duties as an employee or the
relative would not have travelled but for the relationship with the
employee.

Sec 26-30(2) UNLESS:


a) relative, while accompanying the taxpayer, performed substantial
duties as an employee of the taxpayer or taxpayer’s employer and it is
reasonable to conclude that the relative would still have accompanied
the taxpayer even if he/she had no personal relationship with the
Sec 26-30(3) taxpayer
b) Expenditure is incurred in providing a fringe benefit (ie. covering

56
travel expenses of relative.

Employee car parking expenses


Sec 51AGA Not allowed deduction for car parking expenses where car is used to
commute from home to work and is parked near employee’s main
workplace for more than 4 hours between 7am and 7pm.
If one of the conditions are not met, then deduction allowed.
Reimbursement of employee’s expenses
Sec 51AH Where an expense payment fringe benefit is provided to a person (other
than reimbursement of car expenses on the cents per km basis), the
amount of deduction is reduced by the amount of payment or
reimbursement.

Sec 51AJ Deduction denied to employee for his contributions to the private element
of a benefit subject to FBT.

Non-cash business benefits


Sec 51AK Where:
 A taxpayer incurs ‘expenditure’ under an agreement
 Under the same agreement, a non-cash business benefit is provided to
the taxpayer or another person; and
 The non-cash business benefit is not exclusively for use or application
for the purpose of producing assessable income of the taxpayer
The deductible expenditure is reduced by the arm’s length value of the
‘non-cash benefit’.

Occupational Clothing
Div. 34 Expenses incurred by employees not deductible in relation to non-
compulsory corporate wardrobes or uniforms unless design of the
uniform is entered on the Register of Approved Occupational
Clothing at the time the expense was incurred.

Limits on certain deductions


Sec 26-55 Imposes a limit on the amount of certain types of deductions to ensure
they do not generate or increase losses for taxpayers. Deductions are:
 Pensions, gratuities and retiring allowance per s25-50
 Gifts or contributions per Div. 30
 Promoters recoupment tax per s78B
 Development allowance for leasing companies
 Super contributions of self-employed persons and unsupported
employees per s82AAT
 Drought investment allowance for leasing companies.

Self Education expenses


Sec 82AA The first $250 of your claim for self-education expenses is not deductible.

TR 98/9 The $250 must be expenses of self-education, but need not be deductible
under the general deduction provisions.

57
Expenses that are deductible under provisions other than s8-1 are also
taken into account in the s82A calculation.

Anti-Avoidance provisions
Sec 82KJ Losses and outgoings incurred under certain schemes whereby a taxpayer
or his associate acquired property are denied where:
 Outgoing was incurred after 19/4/78 under a tax avoidance agreement
 Amount of loss was greater than amount that could reasonably be
expected to have been incurred at the time had there been no
agreement
 Property has been or will be acquired by the taxpayer under the
agreement
 Consideration payable in respect of the property was less if the
outgoing had not been incurred.

58
Employment Deductions
Sec 8-1; FCT v. Wilkinson It is not necessary for employee to show that the expenditure was incurred
as an express or implied condition of employment. It will NOT be
deductible if:
 Amount is preparatory to earning income and does not arise in the
course of earning income;
 Amount is capital in nature
 It is private in nature
 It is domestic.

TR 98/14 Where an expense allowance is provided:


If the allowance is not assessable because it is subject to FBT, no
deductions is available to the employee for expenses covered by the
allowance.

Specific Deductible Expenses


Employment Agreements
TR 2000/5 The following costs are deductible:
 Costs of drawing up employment agreement with existing employer to
replace an award or in accordance with provision in existing
agreement.
 Costs associated with settlement of disputes arising out of existing
employment agreement
 Providing existing agreement allows for change – costs of changing
the conditions of agreement with same employer.
 Cost of renewing, extending a fixed term agreement which has a
provision allowing for renewal or extension at end of term.

Not deductible:
 Costs of drawing up employment agreement with new employer
 Re-employment with an employer following termination of a fixed
term employment agreement which has no provision for renewal or
extension, costs of drawing up an employment agreement.

Business association subscription


Sec 8-1 Union dues and other periodical subscriptions to trade, business or
professional associations are generally deductible under s8-1 as long
as the association’s services have a direct nexus to the derivation of
taxpayer’s income.

TR 2000/7 Deductible:
 Membership subscriptions – where principal activities of association
are relevant to taxpayer producing or gaining assessable income.
 Levies and other contributions – as long as the purpose for which they
are made is clearly linked to activities by which taxpayer earns
income.

59
Not deductible:
 Joining fees
 Payments to, or to assist, a political party;
 Payments to provide overseas relief
 Payments to assist families of employees suffering from financial
difficulties as result of employees being on strike or having been laid
off
 Payments by elected salaried trade union officials into a general fund
for election of officials.

Clothing and Laundry


Sec 8-1 Deduction allowable if for buying, renting, laundering, dry-cleaning,
repairing and replacing clothing which are protective, occupation
specific, compulsory or registered.

When is it deductible:
TR 94/22 See whether the clothing expenditure has the ‘essential character’ of an
outgoing incurred in gaining or producing assessable income.

TR 97/12  Conventional clothing – not deductible (unless the specific nature of


your job requires you to purchase excessive quantities of it – FCT v.
Edwards. The deduction would be the cost above what you would
otherwise have incurred).
 Occupation specific clothing – deductible
 Protective clothing – deductible
 Compulsory uniform/wardrobe – deductible
 Non-compulsory uniform/wardrobe – only deductible if satisfies
requirements of Div. 34, ie. must be registered but not enforced to
wear.

TR 98/5 Laundry:
Claim deduction for washing, drying or ironing clothes which are:
 Compulsory uniform/wardrobe
 Non-compulsory uniform/wardrobe
 Occupation-specific clothing; or
 Protective clothing.

Home office expenses


Home office v. home study:
TR 93/30 Factors:
 The area is clearly identifiable as a place of business
 The area is not readily suitable or adaptable for use for private or
domestic purposes in association with the home generally
 The area is used exclusively or almost exclusively for carrying on a
business
 The area is used regularly for visits of clients or customers
 Was the home office set up for employee’s convenience, ie. is there an

60
alternative place of work available for taxpayer to conduct her
business? Swinford’s case.

TR 93/30 Where it is a home office:


The taxpayer can claim:
 Interest on home loan, rent, house insurance, rates calculated on floor
area basis.
 Heating, lighting – additional to regular home use.
 Depreciation, insurance, repairs on relevant equipment, desks, chairs,
bookshelves, curtains, floor covering, fluorescent lighting system
 Cleaning costs, pest control on floor area basis.
 Maintenance and decorating.

NOTE: if home is place of business, then CGT will apply to gain or loss
arising when the home is disposed of to the extent that it was used to
produce income.

When it is a home study:


Handley v. FCT; FCT v. Cannot claim deductions under s8-1 for mortgage, interest, house
Forsyth insurance, rent or rates.

Can claim only for additional running costs of the house:


 Deduction for heating/cooling and lighting expenses incurred as result
of taxpayer’s income-producing activities.
 repairs to the premises which are of a non-capital nature as an
expense.

Self-education expenses
Sec 8-1; TR 98/9 Self-education expenses are deductible under sec 8-1 where the expenses
have the necessary connection with the production of the taxpayer's
assessable income.

TR 98/9 What is self education expenses?


 Tuition or course fees (attending educational institution; conferences
or seminars)
 Textbooks, professional and trade journals, technical instruments and
photocopying
 Depreciation of items of plant or article – eg. computers, calculators
 Airfares for overseas study tours or sabbatical, for work-related
conferences or seminars or to attend educational institution.
 Accommodation and meals whilst taxpayer is away from home
overnight
 Interest on moneys borrowed to fund the above.

FCT v. Hatchett; Finn; Connection with production of income:


Smith  The cost of acquiring knowledge is never an outgoing of capital (FCT
v. Hatchett)
 Expenses incurred in keeping up to date or to better enable the
taxpayer to discharge existing duties or to earn present income may be

61
deductible (Finn (1961)).
 Where a new or further qualification is sought, there must be at least a
high degree of probability that it will lead to an increase of earnings if
the cost is to be deductible (Hatchett).
 However, the qualification need not necessarily have to give rise to an
increase in salary (Smith). It will not be sufficient simply to establish
that the employer has encouraged the employee to undertake the self-
education. If the taxpayer is not currently occupied or employed in an
area which makes the study necessary or desirable, it seems that the
cost is not deductible.

Deductions:
TR 98/9 Allowable deduction where:
 Relevant connection to taxpayer’s current income earning activities
 If income earning activities are based on some skill or specific
knowledge and the object of self-education is to maintain or improve
the skill or knowledge, then deductible

 If it leads to or likely to lead to, an increase in taxpayer’s income –


deductible
TR 92/8
Motor vehicle expenses will be self-education expenses if incurred in
travelling between:
 Home – educational institution – home
 Work – educational institution – work
 Home – educational institution (no) – work
TR 98/9  Work – educational institution (no) – home

Not deductible:
No deduction is allowable for self-education expenses where the study is
to enable a taxpayer to get employment, to obtain new employment or
to open up a new income-earning activity (even in the taxpayer's
present employment) (FCT v. MI Roberts)
cost of meals purchased by a taxpayer while attending a course at an
educational institution unless the taxpayer is required to sleep away
from home.
 HECS payment per s26-20
 Expenditure on accommodation and meals where taxpayer travelled to
another location for self-education and has established a new home.

Limits on deduction:
Section 82A  A deduction is not available in respect of the first $250 of certain
kinds of self-education expenses.
TR 98/9  HOWEVER: Deductions for expenses that do not come within the
definition of ''expenses of self-education'' and deductions under other
specific deduction provisions will count in the $250.

Motor Vehicle Expenses


Travel between home & work:

62
FCT v. Collings; FCT v. Generally not deductible even where:
Wiener; Gaydon v. DFCT  Travel allowance received;
 Incidental tasks are performed en route
 Travel is outside normal working hours;
 Involves a second or subsequent trip.
MT 2027 Will be deductible when:
 Travel to client’s premises and then to work (but employer has a
regular place of employment and travels to it habitually; in the
performance of duties of employment, travel is undertaken to an
alternative destination which is not a regular place of employment;
journey is undertaken to location at which employee performs
substantial employment duties).
 Carrying bulky equipment to work when it is requirement that
equipment be stored at home (FCT v. Vogt)
 Where employment starts prior to leaving home (FCT v. Collings)

Itinerant Traveller:
If nature of work of taxpayer is itinerant, then travel from home to work
deductible, ie.:
 Travel is fundamental part of employee’s work
 Employee has no fixed place of work
 Employee continually travels from one site to another.

Superannuation Contributions
Sec 82AAT Contributions by an eligible person deductible when:
 Contributing to complying super fund or RSA to obtain super benefits
for person or dependants of person in event of death;
 Written notice in approved form provided to fund trustees or RSA
provider stating intention to claim deduction and has received
acknowledgment.

Sec 82AAS Who is an eligible person?


Self-employed or substantially self-employed or employee who does not
receive any employer super support.

Maximum allowable deduction


The lesser of:
− The first $5000 plus 75% of excess (for 2002/03 years the base
amount was $3,000)
− Aged base limit

63
Prepayments
Sec 82KZM Any taxpayer incurred deductible expenditure under an agreement entered
into after 25/5/98 but before 21/9/99 in return for services of any kind
which were not to be wholly provided within 13 months of date of
expenditure then timing rules will apply to the deduction of the
prepayment

For section to apply:


 Prepayment must relate to doing of a thing NOT done within 13
months
 Amount is not excluded expenditure and
 Deduction would have been allowed under s8-1 but for this section.

Sec 82KZL What is excluded expenditure:


 Less than $1,000
 Required to be paid by court order or law
 Salary and wages
 Amount which is capital, or private or domestic in nature.

TD 93/118 When s82KZM applies:


Deduction is spread across period of service on days basis. Ie:
Expenditure x (No. of days of Eligible Service Period in expenditure
year / total no. of days in Eligible Service Period)

Sec 82KZL(2) Eligible service period:


Details of periods for interest, rent or lease payments and insurance
premiums – ref. P 4-101

For businesses OTHER THAN small business taxpayers:


Where Eligible Service Period is UP TO 13 months:
Sec 82KZMB Taxpayer may deduct the sum of:
Expenditure x (No. of days of Eligible Service Period in expenditure
year / total no. of days in Eligible Service Period)
AND
A proportion of the later year amount using transitional rules as per
s82KZMB(5) – refer p 4-103

Sec 82 KZMD Where Eligible Service Period MORE THAN 13 months:


For each year, taxpayer may deduct:
Expenditure x (No. of days of Eligible Service Period in expenditure
year / total no. of days in Eligible Service Period)

64
Prepayments by small business taxpayers:
Sec 960-335; 960-350 Small business taxpayers include persons or entities with an average
annual turnover of less than $1m

Prepayments made by small business taxpayers or non-business taxpayers


for a thing to be done within 13 months of date of expenditure is
deductible in the year in which the expenditure is incurred.

65
Depreciation and Capital Works
S40-25(1) You can deduct an amount equal to the decline in value for an income
year of a depreciating asset that you held for any time during the
year:
− Must be a ‘depreciating asset’
− Must be ‘held’ by the taxpayer
− Must be used for a taxable purpose or must be installed ready for use
for that purpose
S40-25(7) Taxable purpose
− Purpose of producing assessable income
− Purpose of exploration or prospecting
− Mining site rehabilitation
− Environmental protection activities
Sec 40-40 Held
PLS 6-2

Sec 42-15 You can deduct depreciation of a unit of plant if:


a) you are its owner or quasi-owner; and
b) you use it, or have it installed ready for use, for the purpose of
producing assessable income.

Plant or Articles:
Yarmouth v. France Plant or articles does not include any part of the setting or environment
within which the income producing activities are carried out.
Distinguish the apparatus used for carrying on income-producing
operation (plant) from items merely functioning as part of general setting
for the income-producing activities (not plant)

J Lyons & Co Ltd v. The See whether item relates to setting in which business is carried on or part
Attorney General of the apparatus used for carrying on the business.

Wangaratta Woollen Mills Is the item in the nature of a tool which plays an integral part in the
Ltd v. FCT production process?

Sec 42-18 Defines ‘plant’ – refer pg 5-2 & 5-3

TD 93/159 Unit of Plant:


For depreciation purposes, item is treated as a separate unit of plant if:
 it is regarded as a whole in itself;
 capable of being separately identified;
 has a separate function of its own.

What is the effective life of the plant?


Sec 42-100(1) Must either:
 work out effective life of plant; or
 adopt the effective life specified by the Commissioner for plant under
s42-110 (individual rate determined by Commissioner as required).

66
Sec 42-105(1) Work out effective life by estimating how long it can be used by any
entity for income producing purposes – do it at time of first use or
installed ready for use.

Sec 42-105(2) In making that estimation, assume:


 plant is new (NOT for plant acquired after 21/9/99)
 subject to wear and tear at rate you think reasonable looking at your
circumstances of use
 will be maintained in reasonably good order and condition.

IT 2685 FACTORS in estimating effective life:


 plant’s potential physical life;
 predictable obsolescence;
 taxpayer’s particular circumstances of use
 technical information – eg. manufacturer’s specification
 whether effective life restricted by duration of project
 taxpayer’s or other users’ own past experience with similar plant.
Sec 42-105(3)
If it is likely that the plant will be scrapped or sold for scrap for
abandoned before end of the effective life, then the effective life ends at
the earlier time.
TD 93/189
If plant can readily be used for other income-producing activities at the
end of the project, the effective life is not restricted to life of the project.
Sec 42-112(1)
Re-estimation:
For plants acquired POST 21/9/99: can re-estimate up or down in the first
income year if you conclude that the effective life has changed due to
changed circumstances.
Sec 42-112(3) BUT
Effective life cannot be re-estimated if plant is subject to accelerated
depreciation rates.
Sec 42-112(4)
Examples of changes in circumstances where you will need to re-estimate
Ref pg. 5-12
Sec 42-112(5)
Work out new estimated life as per usual.
Sec 42-112(2)
New effective life starts to apply for the income year for which you make
the choice.

What is the cost of plant?


Sec 42-65 Method statement – refer pg 5-4

Adjustments to cost:
After cost has been determined, may need to adjust due to:
Sec 42-75  plant being acquired under non-arm’s length transaction
Sec 42-90  another taxpayer has previously claimed depreciation deductions for
the plant

67
Sec 42-80  cost of car > car depreciation limit
Sec 42-70  cars acquired at discount under certain schemes to avoid car
depreciation limit
Sec 42-85  part of plant’s cost is deductible under some other provision
Sec 42-82  lessor is treated as quasi-owner under s42-312 acquires plant under a
sale and leaseback agreement

Motor Vehicle cost limit:


Sec 42-80 Cost base of motor vehicle for purpose of calculating depreciation is held
to an upper maximum limit – for 99/00 & 00/01, it is $55,134

Sec 42-70(1) Where the cost of the car must be increased, eg. when the car is acquired
at a discount – ref p 5-9

Calculation of depreciation percentage:


Sec 42-25(1) Annual % is calculated on basis of effective life of plant. Effective life
can be based on Commnr’s guidelines or self-assessment of effective life.

Rate of Depreciation:
Pre 21/9/99 plant:
Sec 42-125(1) There are general rates for plant acquired between 27/2/92 an 21/9/99
which can be used

Sec 42-120(2) Must choose rate of depreciation to be used for the income year in which
a depreciation deduction is first allowable to the taxpayer.

Post 21/9/99 plant:


Depreciation rates determined by reference only to effective life of plant:
Sec 42-160(3) Diminishing value rate = 150% / effective life (in years)
Sec 42-165(2A) Prime cost rate = 100% / effective life (in years)

For small taxpayers:


Entitled to usee accelerated depreciation rates for plant acquired after
21/9/99 (NO ONE ELSE can) as long as conditions in s42-345(1) are met.
Refer p 5-14.

General Depreciation Rates


For Plant Acquired Between 26/2/92 and 21/9/99 (for post 21/9/99, see above)
For small taxpayers: Applies to plant acquired before & after 21/9/99
Description Section Depreciation Rate
Reference Prime Cost Diminishing
Value
Items which cost more than $300 42-167
 acquired before 1/7/00 100% 100%
 acquired by small business taxpayer up 100% 100%
to 2001

Items used for scientific research acquired 42-145

68
before 1/7/95, AND:
 which have an effective life of at least 33% 50%
5 years; or
 are an eligible motor vehicle or
eligible artwork

Items used for providing employee 42-150


amenities:
 which have an effective life of at least 33% 50%
5 years

Years in effective life:


 fewer than 3 42-125 100% N/A
 3 to fewer than 5 40% 60%
 5 to fewer than 6 2/3 27% 40%
 6 2/3 to fewer than 10 20% 30%
 10 to fewer than 13 17% 25%
13% 20%
 13 to fewer than 30
7% 10%
 30 or more

Sec 42-25(3) Methods of depreciation:


 prime cost method
 diminishing value/reducing balance method.

Where plant acquired:


 after 26/2/92 but before 21/9/99; or
 after 21/9/99 by small business taxpayers
Diminishing value method:
Sec 42-160(1) [(Opening Undeducted cost x Days owned)/365] x Diminishing value rate

Opening undeducted cost = undeducted cost of plant on first day of


income year on which you were its owner or quasi-owner.
Days owned = no. of days in income year you were owner or quasi-owner
Sec 42-165(1) Prime cost method:
[(cost x days owned)/365] x prime cost rate

Where plant acquired after 21/9/99 by non-small business taxpayers


Sec 42-160(3) Diminishing value method:
Opening undeducted cost x (days owned/365) x (150%/Effective life)
Sec 42-160(2A) Prime cost method:
Cost x (days owned/365) x (100%/Effective life)
Apportionment of depreciation deduction:
Sec 42-170 Where asset acquired during the year, depreciation calculation must be
calculated for those days in year during which the asset was installed
ready for use or used to produce assessable income.

69
Disposal of Asset:
[NOTE: generally, termination value = sale price – expenses of sale]
Where termination value (s42-205 definition) < written down value:
Sec 42-105(1) Can deduct an amount if the termination value of plant < undeducted cost
(depreciated value)

Sec 42-105(2) The amount you deduct is the difference between the two amounts.

Where termination value > written down value:


Sec 42-190(1) Include in assessable income.

Sec 42-190(2) Amount of balancing charge to be included is the LESSER of:


 amounts that taxpayer has deducted or can deduct for depreciation of
plant
 amount by which termination value > WDV

Balancing Adjustment Relief:


Sec 42-285(2) Taxpayer may choose to have the balancing charge deducted from:
1) the cost of any replacement items;
2) the cost of other depreciable items acquired in year of disposal; then
3) the WDV of other selected depreciable items of plant held at
beginning of year.
BUT only available for all taxpayers for disposals BEFORE 21/9/99
For disposals after 21/9/99, only available to small business taxpayers or
some involuntary disposals.

Sec 42-290 Balancing adjustment can be offset against replacement plant if acquired
within 2 years of end of income year during which the balancing
adjustment event occurred.

GST related expenses


Sec 42-168 Expenditure incurred by small and medium sized businesses on acquiring
plant for purposes of implementing GST is immediately deductible
provided following conditions are met:
 plant was acquired during 1/7/99 to 30/6/00
 one of the reasons for acquisition was to meet obligations of business
or exercise of its entitlements under the GST law
 has pre-GST annual turnover of <$10m
 registered for GST before 1/7/00
 before 1/7/01, was owner or quasi owner of plant and use it or have it
installed ready for use for purpose of producing assessable income.

Plant upgrades:
Sec 25-80(1) Expenditure entirely deductible if conditions above satisfied.
Computers Hardware and Software
Div 46 Allows depreciation deduction over 2.5 years for expenditure incurred in
acquiring, commissioning or developing software after 11/5/98.

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Immediate deduction for software:
Sec 46-65 Total expenditure on acquiring, developing or commissioning software is
$300 or less provided total cost of all purchases of identical software does
not exceed $300 in a year.

Sec 46-70 For software projects (commissioning or developing in-house) which are
abandoned before software is used or installed ready for use.

Sec 46-70(1) For the abandonment, can deduct if:


 incurred expenditure with intention of using software for purpose of
producing assessable income; and
 expenditure relates to unit of software that you have not used or had
installed ready for use; and
 in current year, you have decided that you will never use the software,
of have it installed ready for use
 the expenditure is not in your software pool.
Sec 46-75 Expenditure incurred before 1/1/00 on software or in substantially
rebuilding current software provided that the principal purpose was to
ensure Y2K compliance.

Depreciation of software:
Sec 46-35 The prime cost method must be used

Sec 46-40 The effective life of software is 2.5 years

Sec 46-45 The depreciation rate is 40%

Sec 46-55 Balancing adjustment even occurs if the software permanently ceases to
be used or installed ready for use.

Development of website:
TR 2000/D6 Cost of acquiring, developing or constructing a website is ‘expenditure on
software’ under Div 46.
Depreciable over 2.5 years over a period where the website is used as part
of a commercial venture carried on for the purpose of producing
assessable income.

Alterations to website represent acquisition of additional software if new


functions are introduced. Ongoing operating expenses of commercial
websites are allowable deductions.

71
Deductions for Capital Works
Sec 43-10(2) For a capital works to be deductible:
 the capital works must have a ‘construction expenditure area’;
 there must be a ‘pool of construction expenditure’ for that area; and
 the taxpayer uses the taxpayer’s capital works area in a deductible
way.

Sec 43-20 What sort of capital works?


 Buildings (building, extension, alteration or improvement) begun in
Australia after 21/8/79 or outside Australia after 21/8/90
 Structural improvements (extensions, alterations or improvements) –
eg. sealed roads, driveways, carparks, airport runways, bridges,
pipelines, tunnels, retaining walls, fences, dams, artificial sports field;
and earthworks integral to construction of structural improvement
 Environment protection earthworks

Sec 43-75 Construction expenditure area:


For capital works begun after 30/6/97:
 Part of capital works which the CE was incurred that, at time it was
incurred, was to be owned or leased by entity…
For capital works begun before 1/7/97:
 Part of capital works on which CE was incurred that, at the time it was
incurred, it was owned or lease by entity…and
 At time of completion of construction was to be used in way described
in Column 3 of Table s43-90.

Sec. 43-85 “Pool of CE”


So much of the CE incurred by an entity on capital works as is attributable
to the CEA.

What is deductible?
Sec 43-15(1) A portion of your construction expenditure. BUT cannot exceed the
amount of undeducted construction expenditure.

What is the rate of deduction?


Sec 43-25(1) For post 26/2/92 capital works, rate of deduction is:
 2.5% for capital works used in a deductible way, eg. for purpose of
producing assessable income;
 4% for capital works used in the “4% manner”

Sec 43-25(2)  For pre 26/2/92, rate of deduction is 4% for capital works used in
deductible way if capital works started after 21/8/84 and before
16/9/87.
 In other cases, rate of deduction for pre 27/2/92 is 2.5%.

How is deduction calculated?


Sec 43-210 Construction expenditure x Applicable rate x (Days used/365)

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“4% manner”:
Sec 43-145 Table under section – applies only to capital works that are buildings
started after 26/2/92. Ref. P 5-27

Sec 43-70(2) “Construction Expenditure”


Indicates what is NOT construction expenditure – ref. Pg 5-28.

Destruction of capital works:


Sec 43-40(1) Amount is allowable as capital works deduction if all or part of the capital
works is destroyed, PROVIDED:
 Taxpayer is eligible for deduction re capital works under Div. 43, Div.
10C (capex on traveller accommodation) or 10D (capex on some
buildings and structural improvements)
 There is an amount of ‘undeducted construction expenditure’ re the
capital works; and
 Taxpayer was using the capital works in a deductible way before the
destruction.

Sec 43-250 Balancing deduction:


Balancing deduction = Undeducted Construction Exp – amount received
as result of destruction of capital works.

Business Related Cost – Blackhole Expenditure


Sec 40-880 − Establish a business
− Covert an existing business structure to a different structure
− Raise equity for the business
− Defend the business against a takeover
− Conduct an unsuccessful takeover attempt
− Liquidation a company that carried on a business and of which the
taxpayer is a shareholder, or
− Stop carrying on a business

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Tax Losses
Sec 36-10 Tax Loss = Deductions (other than c/f losses) – Assessable Income – Net
Exempt Income

Sec 26-55 Restrictions:


Gifts, pensions, gratuities or retiring allowances, promoters recoupment
tax, certain superannuation contribution, drought investment allowance
and development allowance (both to the extent that these allowances
apply to a leasing company) CANNOT create or add to a tax loss.

Sec 36-20 Net exempt income:


For residents:
Total exempt income
– Non capital losses incurred in deriving exempt income
– Non-Australian taxes on exempt income.

For Non-residents:
Australian sourced exempt income
– excluded exempt income (defined in s36-20(3), ref pg. 7-2)
– exempt income subject to WHT (per s128D)
+ s26AG (film proceeds) exempt income – exempt income subject to
WHT
– non-capital losses incurred in deriving exempt income
– non-Australian taxes on s26AG income.

Deducting tax losses:


Sec 36-15 How to use deductions – Ref to pg. 7-3

Sec 36-15(5) If have 2 or more tax losses, deduct them in order in which they were
incurred.

Sec 36-15(6) Tax loss can be deducted only to extent that it has not already been
deducted.

Sec 36-15(7) If cannot deduct all or part of your tax loss in an income year, can carry
forward to the next income year.

Sec 375-820 If more than one class of loss incurred in one year, can deduct against
future income in following order:
 film losses incurred in 89/90 and subsequent years (but only against
film income)
 primary production losses incurred before 89/90 year
 general domestic losses (includes primary production losses) incurred
in 89/90 and subsequent years.

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Foreign Income Losses
Sec 79DA Domestic losses can be offset against foreign source income at choice of
taxpayer.

Sec 79D Foreign deductions are quarantined against foreign source income of same
class

Sec 160AFD(2) & (7) Foreign income loss incurred after 1989 income year can be carried
forward indefinitely for recoupment against assessable foreign income at a
later year.

Sec 160AFD Foreign loss can only be applied against foreign income of same class.
Foreign income categorised as:
 interest income
 modified passive income
 offshore banking income and
 all other assessable foreign income.
Sec 160AEA(1) Passive income is:
 dividends, unit trust distributions, interest income, annuities, rental
income, royalties, assignment receipt, profits of capital nature, etc
Sec 160AEA(2) Modified passive income is:
 Passive income excluding interest income.

Losses of Previous Years:


Sec 165-10 Companies cannot deduct losses unless either:
a) it meets the conditions in s165-12 (same ownership test); or
b) it meets the conditions in s165-13 (same business test).

Continuity of ownership test:


To pass the continuity of ownership test:
Sec 165-12(2)  Voting power: there must be persons who had more than 50% of
voting power in company at all times during the ownership test period
(test in s165-50)
Sec 165-12(3)  Rights to dividends: there must be persons who had rights to more
than 50% of the company’s dividends at all times during the
ownership test period (test in s165-155)
Sec 165-12(4)  Rights to capital distributions: there must be persons who had rights to
more than 50% of the company’s capital distributions at all times
during the ownership test period (test in s165-160)
NEED TO SATISFY ALL

Sec 165-12(1) Ownership test period:


For income years after 21/9/99:
Test period is the period from the start of the loss year to the end of the
income year.

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Sec 165-15 For income years prior to 21/9/99:
Test only had to be satisfied in both income and loss year, NOT
intervening period.

Change in Control of voting power:


Where:
 For some or all of the ownership test period that started at the end of
the loss year, a person controlled, or was able to control the voting
power in the company;
 For some or all of the loss year, the person did not control and was not
able to control that voting power; and
 Person began to control, or became able to control, that voting power
for the purpose of getting some tax advantage.
If so, company CANNOT claim tax loss unless satisfy same business
test.

Concessional Rules for listed public companies:


Sec 166-5(2) Listed public company taken to have met conditions in s165-12 if there is
substantial continuity of ownership of company between start of test
period and each of these other times:
 Time of each abnormal trading in shares in the company; and
 End of each income year.
‘Substantial continuity is the same as continuity of ownership test, ie.
more than 50% of voting power, dividends and capital distributions.

Sec 960-225(1) Defines what ‘abnormal trading’ is – ref p 7-7

Same Business Test


Sec 166-13 The company cannot deduct losses of previous years unless the same
business test is satisfied, ie:
 The company must carry on the same business throughout the income
year as it did immediately before test of time; and
 Company must not, at any time during the income year, derive
assessable income from business of a kind that it did not carry on
before the test time, or from a transaction that it had not entered into in
the course of its business operations before the test time.

Sec 165-210(1) The company satisfies the same business test if throughout the same
business test period, it carries on the same business as it carried on
immediately before the test time. (refer to p7-9 – steps to work it out)

Test period: the period throughout the income from the time immediately
before the change in ownership.

What is Same Business?


TR 1999/9  Significant weight given to changes in income producing product or
service, how it is produced, acquired or provided and/or changes in the
market

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 Mere existence of an intention or power to carry out certain business
activities irrelevant.
 Mere change in process by which business is carried on does not mean
the test is failed.
 Expansion or contraction of the business does not necessarily result in
change of business – therefore, organic growth through adoption of
new compatible operations in the ordinary way, or discard of old
operations may not fail test BUT sudden and dramatic change brought
about by loss or acquisition of business operations on a considerable
scale is likely to change the business
 Discontinuance of a significant part of the business by cessation or
sale or commencement or acquisition of new undertakings – may fail.
 Where company’s activities have wound down to the extent that
company is not in fact carrying on business
 Continuity of name of company
 Continuity of location
 Existence of periods of dormancy, reasons and reasons for resumption
TR 1999/99  Continuity of custom and goodwill

For a manufacturing business:


 Is there a change in product manufactured and how major is the
change? Ie. issue of a new model v. release of complete new product
line.
 Have any new business activities been commenced?
 What is the nature of any changes in the level of manufacturing? Ie.
outsourcing v. conversion of manufacturing business into one of
assembling parts manufactured by others.
 Are there changes to the market for the product?
 Are there changes to the turnover or gross assets of the company
attributable to various product
 Are there changes to the goodwill of the business?
 Are there any changes to the location of the business or its customers
 Are there changes in trade names, trade marks, patents, royalty
Sec 165-210(2) arrangements, etc – significant if the IP is significant

Additional Requirements to be satisfied to pass same business test


 New business test – company MUST NOT derive assessable income
from business of a kind it did not previously carry on
 New transactions test – company MUST NOT derive assessable
income from a transaction of a kind which it did not previously enter
into in the course of its business operations.

Current year losses


Current year loss rules will apply if:
Sec 165-35  The company does not pass the continuity of ownership test or the
same business test for the whole year; OR
Sec 165-40  Person begins to control, or becomes able to control, the voting power
in the company where one purpose of obtaining that control is to get a

77
tax benefit or advantage.
IF it applies, current year losses not considered when calculating taxable
income.
When is there a change of ownership that will trigger the section?
Sec 165-35 Rules will apply UNLESS:
 There are persons who had more than a 50% stake in the company
during the whole of the income year; OR
 There are persons who had more than 50% stake in company for first
part of year, but company satisfies same business test for rest of the
year.

Same business test:


 Must carry on same business throughout balance of year as it did
immediately before the end of part of the year in which the 50% stake
condition was satisfied; AND
 Company MUST NOT, at any time during the balance of the year,
derive assessable income from a business of a kind that it did not carry
on before the test time, or enter into a transaction it had not entered
into in course of its business operations before the test time.

Sec 165-25(1) Calculation of taxable income:


Method statement – pg 7-14

Sec 165-55 Attributing deductions – pg. 7-14

Transfer of Losses
Conditions for grouping a loss:
Sec 170-5(1) Transfer must be from one company to another company

Sec 170-5(2) Both companies must be members of same wholly-owned group.

Sec 170-5(3) Transfer must be ‘surplus’, ie. transferring company cannot use it as not
enough income to offset it. The other company must have enough income
to offset the transferred losses.

Sec 170-5(4) Neither company must be prevented from deducting the loss by Div 165
or 175

Sec 170-5(5) Tax loss transferred by an agreement between the two companies.

Conditions for transfer of losses:


Sec 170-30(1) Both companies must be in existence during at least part of each:
 The loss year;
 The deduction year; and
 Any intervening income year.

Sec 170-30(2) Both companies must be members of same wholly-owned group during
whole or part of those income years when both were in existence.

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Sec 170-35(1) Loss company must be:
 An Australian resident and not a prescribed dual resident; and
 Must not be a dual resident investment company in either loss year or
deduction year.

Sec 170-40(1) The income company must be an Australian resident.

Sec 170-35(2) If loss year and deduction year are the same, it must be that the loss
company was not required to calculated tax loss under:
 Sec 165-70 (change in ownership); or
 Sec 175-35 (injected income or deductions)
Sec 170-35(3) It must be that loss company would not have been prevented from
deducting the tax loss in the deduction year itself if it had enough
assessable income to offset it.
Sec 170-40(2) The income company must not be prevented by Div. 165 or 175 from
deducting the transferred amount in the deduction year.

Subdiv. 975-W Wholly owned group:


Two companies are members of a wholly owned group if:
a) one of the companies is a 100% subsidiary of the other company; or
b) each of the companies is a 100% subsidiary of the same third
company

Amount that can be transferred:


Sec 170-45(1) Amount transferred cannot exceed amount of loss company’s tax loss that,
apart from the transfer, the loss company would c/f to next year.

Sec 170-45(2) Amount transferred cannot exceed amount which the income company
can use.

Sec 170-55(1) If loss company has two or more tax losses that it can transfer in the
deduction year, it can transfer them only in the order of them being
incurred.

Sec 170-60 Income company cannot transfer a loss which was transferred to it.

Written agreement to transfer losses:


Sec 170-50(1) Transfer must be made by a written agreement between loss company and
income company.

Sec 170-50(2) Written agreement must:


1) specify income year of transfer
2) amount of tax loss being transferred
3) signed by both public officers
4) made on or before lodgement of income company’s ITR.

79
TRADING STOCK
Trading Stock
What is trading stock?
Sec 70-10 Trading stock includes anything produced, manufactured or acquired that
is held for the purposes of manufacture, sale or exchange in the ordinary
course of business AND livestock.

All States Frozen Foods Items become trading stock when taxpayer is in a position to dispose of
Pty Ltd v. FCT them.

Types of trading stock


Packaging Items:
TR 98/7  Items held by taxpayer trading in packaging items: whether as
manufacturer, wholesaler or retailer and whether or not the items are
returnable packaging in hands of customer and taxpayer produces,
manufactures or acquires items for sale in ordinary course of business
– trading stock
 Items held by taxpayer trading in goods other than packaging
items: Trading stock if:
 Taxpayer is, or will be engaged in business trading in ‘core
goods’ and
 Items are closely associated with core goods sold, ie. they
form part of the core goods or bring the core goods into the form,
state or condition in which they are sold to customers; AND
 Items are disposed of by the taxpayer in conjunction with
sale of core goods.
 Packaging items held for purpose of manufacture: packaging items
held by taxpayer who carries on business as manufacturer and who
obtains items for purposes of manufacturing other goods in ordinary
course of business AND incorporate the items in the manufacture
process – trading stock
 Returnable packaging items: if held by taxpayer who engages in
business trading core goods but who do not dispose of or pass
property in the items to its customers – not trading stock.

IT 333 Consumable Store:


Items which are consumed in the manufacturing/maintenance process.
Deductible when purchased – NOT trading stock.
 If spare parts – average life span is 2 years and claim deduction on
usage basis
 If store and consumables (eg. fuel and oil) – average life span is 3
months and deduct on purchase basis.

80
TR 98/8 Materials and Spare Parts:
Trading stock if:
 Taxpayer is or will be carrying on a business providing services to
customers for reward; and
 Materials or spare parts are supplied by taxpayer to customer in the
course of, and as an essential part of, performing the service; and
 Materials or spare parts are separately identifiable things before and
after the services are provided which retain their individual character
in nature, ie. not used up significantly
 Materials and spare parts are disposed of to customer.
Guinea Airways Ltd v. Generally, spare parts held for repair and maintenance are not trading
FCT stock.

Land:
St. Hubert’s Island Pty Ltd Land can be trading stock in the hands of a property developer.
v. FCT

TD 92/124 Single acquisition of land for purpose of development, subdivision and


sale by business – trading stock. Acquisition does not have to be
repetitive.
To be trading stock, land must be:
 Acquired for resale; and
 Business activity which involves dealing in land must have
commenced.

Investment and Merchant Shares:


Finance Corp. Ltd v. FCT If the taxpayer is a share trader, shares can be trading stock.

Trading stock – Assessable Income/Allowable deduction:


Sec 70-35(1) If you carry on a business, compare:
 Value of trading stock on hand at start of year; and
 Value of trading stock on hand at end of year.

Sec 70-35(2) Assessable income = Closing stock value – Opening Stock Value

Sec 70-35(3) Allowable deduction = Opening stock value – closing stock value

Sec 70-15 Timing of deduction:


 If item becomes part of trading stock before or during income year in
which outgoing is incurred, the outgoing is deductible in that year
 Otherwise, the outgoing is deductible in first income year in which
either:
 Item becomes part of trading stock on hand
 An amount is included in assessable income re the disposal
of the item.

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When Is trading stock ‘on hand’
FCT v. All States Frozen Stock may be on hand even though taxpayer does not have physical
Foods Pty Ltd possession. The stock on hand is that which has been delivered, or goods
in transit provided title has passed to taxpayer.

Farnsworth v. FCT  Key test for whether stock is on hand is whether the taxpayer has
dispositive power over the stock – ie. power to dispose of the stock. If
the taxpayer has the power, then it is trading stock, this is even so if
the power to dispose has been invested in an agent.
 BUT even if the taxpayer stills owns the stock, if the power to dispose
does not exist, it will not be ‘on hand’.

Sutton Motors  When item is held for sale or exchange, the fact that the taxpayer does
not own it or has not paid for it, will not preclude the item from being
stock on hand of the taxpayer.

All States Frozen Foods  Taxpayer who has property in stock, normally has the power to
dispose of it.
 Goods in transit will be stock on hand of taxpayer if the taxpayer has
the power of disposal (also IT 2670)
Gasparin v. FCT Land:
 Land will remain trading stock on hand until settlement – it is then
that the seller finally loses all dispositive power and the contingency
that the sale will not proceed is gone.
TR 95/7
Lay-by sale agreement:
Trading stock on hand of seller as seller still has possession.

Goods on consignment:
IT 2472
 where goods on consignment delivered to agent for sale on behalf of
consignor as principal – goods remain trading stock of consignor.
 Where goods are delivered to the consignee on approval, or on sale or
return, and the consignment involves sale of the goods to the
IT 2670 consignee – goods are trading stock on hand of the consignee.
If an agent is used to dispose of stock on behalf of taxpayer, goods will
still be stock on hand of taxpayer, even though agent has physical
possession of the stock.

TR 97/15 Conditional contracts:


Conditional contracts are:
 Goods typically sold by seller to purchaser on basis that parties intend
that property in goods passes immediately to purchaser on delivery of
goods;
 Subject to the condition;
 That purchaser may return goods at any time in which case seller is
obliged to repurchase the goods.

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 Goods delivered to purchaser under conditional contract – purchaser
has both property in and physical possession of the goods – trading
stock on hand of purchaser.
 Purchaser returns goods to seller before year end – property in and
physical possession of goods back to seller – trading stock on hand of
seller.

Trading stock valuation


Sec 70-40(1) Value of trading stock on hand at the start of the year is the same amount
at which it was taken into account at the end of last year.

Sec 70-40(2) The value of trading stock on hand is nil if the item was not taken into
account at the end of last year.

Sec 70-45(1) 3 bases of valuing trading stock:


MUST elect to value each item of trading stock on hand at end of income
year at:
 Cost;
 Market selling value; or
 Replacement cost.

Australasian Jam Co Pty Basis for valuation can change from year to year as long as the opening
Ltd v. FCT stock must equal the closing stock of the previous year. ALSO identical
items can be valued using different methods.

Sec 46(7A) Where it is evident that one of the company’s purpose in exercising an
option to give a higher closing value to trading stock is to increase the
inter-corporate dividend rebate, the Commissioner is authorised in
calculating the rebate to calculate it as if an option to value the trading
stock at the lowest possible value was exercised by the taxpayer.

GST implications:
In working out the cost, market selling value or replacement cost of
trading stock (other than an item which cannot be taxable supply) at end
of year, disregard the ITC you would be entitled to if:
a) you had acquired the item at that time; and
b) the acquisition had been solely for a creditable purpose.

Cost Price Valuation:


What is cost price?
12 CBTR Case 19 It is full absorption costing – includes purchase price as well as
appropriate costs associated with bringing the stock into its existing
condition and location (eg. freight, insurance, customs) – ref. 8-11

Methods of valuing stock at cost – refer pg 8-13

Phillip Morris Ltd v. FCT For manufacturers:


Cost price is the amount expended in the course of manufacturing
activities in order to bring the article into the state in which it was when it

83
became part of trading stock on hand.

IT 2350 The manufacturers will need to use a full absorption costing method if
they choose the cost valuation method. There are 3 elements to be taken
into account – material costs, direct labour costs and production overhead
costs. (Refer pg 8-12 for examples)

Market Selling Value:


Refer pg 8-13

Australasian Jam Co Pty  the market selling value contemplates a sale in the ordinary course of
Ltd v. FCT business, not as a result of the most disadvantageous sale (eg. forced
sale).

Replacement Price:
Parfew Nominees Pty Ltd Only use if replacement items are in fact available in the market and these
v. FCT; TD 92/198 are substantially identical to the replaced item.

TD 92/198 Replacement price is the amount which the taxpayer would have to pay in
his buying market in order to replace a substantially identical item.

Trading Stock Issues:


Sec 70-20 Non-arm’s length transaction:
If:
a) a taxpayer incurs an outgoing that is directly attributable to buying or
obtaining delivery of an item of trading stock; and
b) the taxpayer and the seller of the item did not deal at arm’s length; and
c) the amount of outgoing is greater than the MV of the what the
outgoing is for,
the amount of the outgoing is deemed to be MV for both buyer and seller
(ie. for buyer – MV applies in s8-1 deductibility and cost of valuation;
seller – included in assessable income).

DOES NOT apply if:


 transfer pricing arrangements apply
 item is not trading stock of buyer, even if it is for the seller
 outgoing incurred in buying or obtaining delivery is equal to or less
than MV; or
 cost of manufacturing or producing trading stock – section only
applies to buying or obtaining delivery of trading stock.

Sec 70-30(1) If you start holding as trading stock an item you already own:
a) just before it became trading stock, the taxpayer is treated as if it had
been sold to someone else for whichever amount is elected:
 cost of item; or
 market value just before it became trading stock AND
b) the taxpayer immediately bought it back for the same amount.

Sec 70-30(5) EXCEPTION:

84
Section does not apply if you start holding as trading stock:
 standing or growing crops;
 crop-stools
 trees planted and tended for sale
because they are severed from land.
BUT, section WILL APPLY to the severed item that you later start
holding as trading stock.

Sec 104-220 CGT Implications:


As there is a deemed sale and repurchase, a CGT event K4 will arise and a
capital gain will arise. Therefore, any pre-CGT property that is
transferred into trading stock will now be treated as having been acquired
post-CGT at time of deemed sale and re-acquisition.

Sec 70-110 Where item stops being held as trading stock:


Where an item of trading stock stops being held by taxpayer as trading
stock but continues to be owned by the taxpayer, the owner is deemed to
have sold the item and re-acquired it at cost. (see below – disposal)

Sec 70-50 Obsolete stock:


Can elect to value an item of trading stock below values in s70-45 if:
a) there is obsolescence or other special circumstances in relation to the
particular item;
b) taxpayer makes an election;
c) value elected is lower than values under s70-45; and
d) value elected is reasonable.

Livestock:
Refer pg. 8-16

Disposal of Trading Stock


Disposals NOT in the ordinary course of business:
Sec 70-90(1)  there is disposal by taxpayer
 of trading stock or of standing or growing crops, crop-stools or trees
planted and tended for sale;
 which are an asset of a business
 that is carried on by the taxpayer; and
 the disposal (actual, not deemed) was not in the ordinary course of the
business.
The assessable income will include the MV of the item on the day of
disposal.

BUT section does not apply if the item used to be trading stock or which
was trading stock of a business which is no longer carried on.
Sec 70-90(2) Any amount actually received for disposal is not included in assessable
income.
Sec 70-95 Implications for Acquiring entity:

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Deemed to have bought the stock at the market value
Case R85
What is NOT ordinary course of business?
Consider:
 nature of business being carried on
 what are normal transactions in the course of that business; and
 why this transaction is potentially outside the course of the business.

Partial change of interest in trading stock:


Sec 70-100(1) Item of trading stock is treated as having been disposed of outside the
ordinary course of business if it stops being trading stock on hand of the
transferor and, immediately afterwards:
a) the transferor is not the item’s sole owner; BUT
b) an entity that owned the item immediately beforehand still has an
interest in the item.
The effect is:
a) transferor’s assessable income includes the MV of the item on the day
Sec 70-100(2) on which it ceases being trading stock on hand of transferor
b) transferee is treated as having bought the item for the same value on
Sec 70-100(3) the day.

Election to NOT apply market values:


Sec 70-100(4) Election can be made to treat item as having been disposed of for what
would have been its value as trading stock of transferor on hand at end of
income year, ending that day (ie. book value).

Sec 70-100(5) If election made, value is included in transferor’s income and the
transferee is treated as having bought the item for same value.

Sec 70-100(6) Conditions for election:


 item has become, immediately after ceasing to be trading stock on
hand of transferor, an asset of a business carried on by the transferee;
 entity or entities that owned the property before the change hold at
least 25% of its market value (on day of change) in interest after the
change
 value elected is less than MV; and
 item is not a thing in action.
Sec 70-100(7) Election can only be made before 1/9 following end of relevant financial
year.
Sec 70-100(8) Election must be in writing and signed by:
 entities that owned the item immediately before it stopes being trading
stock on hand of transferor; and
 entities that own it immediately afterwards.

Devolution of Trading Stock on Death:


Sec 70-105(1) Where person dies, MV of trading stock of person’s business is included
in income derived by deceased owner up to date of death.

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Sec 70-105(2) Person on whom the property devolves is deemed to have purchased it at
MV.

Sec 70-105(3) Legal representative of deceased may elect to have include in assessable
income the amount that would have been the value of the trading stock at
the end of an income year ending on the day of death.

Ceases to be Trading Stock:


Sec 70-110 If you stop holding an item as trading stock, but still own it, you are
treated as if:
a) just before it stopped being trading stock, you had sold it to someone
else (at arm’s length and in the ordinary course of business) for its
cost; AND
b) you had immediately bought it back for same amount.
[ie. deemed disposal and re-acquisition at cost – the amount is included in
assessable income of taxpayer]

Transitional Rules:
Refer pg 8-23 (for trading stock ceasing to be pre 1/7/97)

Insurance or indemnity for loss of trading stock:


Sec 70-115 Assessable income includes amount:
a) received by way of insurance or indemnity for loss of trading stock;
and
b) not assessable as ordinary income under s6-5.

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CAPITAL GAINS TAX

What is a CGT Asset?


Sec 108-5(1) An asset is any kind of property or a legal or equitable right that is not
property.

Sec 108-5(2) CGT assets are:


 part of, or an interest in, an asset referred to in subsec. (1)
 goodwill or an interest in it
 an interest in an asset of a ptsp
 interest in a ptsp that is not covered by above.
Sec 108-7 Joint tenants:
Individuals who own CGT assets as joint tenants are treated as if they
each owned a separate CGT asset constituted by an equal interest in the
asset and as if each of them held that interest as a tenant in common.
TD 1999/D69 Know how:
Know how is not a CGT asset.

Separate Assets
Div. 108 Refer pg 5-4 for list of separate assets

Sec 108-80 Improvements:


To see whether capital improvements are related to each other, consider:
a) nature of CGT asset to which the improvements are made;
b) nature, location, size, value, quality, composition and utility of each
improvement;
c) whether improvement depends on a physical, economic, commercial
or practical sense on another improvement;
d) whether improvements are part of an overall project
e) whether improvements are of the same kind
f) whether improvements are made within a reasonable period of time of
each other.

TR 2000/31 Multiple interests of taxpayer in the same CGT asset:


Where different interests are acquired in the same asset on separate
occasions – each interest remains a separate CGT asset, with a separate
cost base and separately determined capital proceeds.

Sec 116-40 Allocation of capital proceeds:


If asset deemed to be comprised of two or more separate assets, the capital
proceeds should be apportioned between deemed separate asset.

TD 98/24 Where parties are dealing at arm’s length, Commissioner will accept the
allocation.
 In absence of agreed allocation, each party needs to make his/her own
reasonable apportionment. Need to have regard to and be able to
justify, his/her reasonable apportionment based on relevant MV’s of

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separate assets at time of making contract.
 WDV of depreciable assets not necessarily their MV.

Personal Use Asset


Personal use asset is:
Sec 108-20(2) a) CGT asset (except collectable) that is used or kept mainly for your (or
your associate’s) personal use or enjoyment; or
b) An option or right to acquire a CGT asset of that kind
c) A debt arising from a CGT event in which CGT asset in (a) was the
subject
d) A debt arising other than:
 In the course of gaining or producing assessable income; or
 From carrying on a business.

Sec 108-20(3) DOES NOT include:


 Land, stratum unit or building or structure taken to be a separate CGT
asset.

Collectable is:
Sec 108-10(2) a) artwork, jewellery, an antique, or a coin or medallion; or
b) a rare folio, manuscript or book;
c) postage stamp or first day cover
that is used or kept mainly for your personal use or enjoyment.

Sec 108-10(3) ALSO includes:


a) interest in any of the things above;
b) debt arising from above things
c) option or right to acquire above things.

Capital gains/losses from PUA and collectables:


Personal use assets:
Sec 108-20(1) Capital loss from a PUA is disregarded.

Sec 118-10(3) Capital gain from a PUA is disregarded IF you acquired the asset for
<$10,000 (exclude net ITC)

Sec 108-25 For cost base of a PUA, disregard the third element – non-capital costs of
ownership

Collectables:
Sec 108-10(1) Capital losses from collectables can be used only to reduce capital gains
from collectables.

Sec 108-10(4) Unused capital losses from collectables can be applied in following year
against capital gains from collectables exceeding capital losses from
collectables.

Sec 108-17 For cost base of a collectable, disregard the third element – non-capital
costs of ownership.

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Sec 118-10(1) Disregard capital gain or loss from collectable if you acquired for $500 or
less (excluding net ITC).

Sec 118-10(2) HOWEVER, if collectable is an interest in:


a) artwork, jewellery, an antique, or a coin or medallion; or
b) a rare folio, manuscript or book;
c) postage stamp or first day cover
capital gain or loss made from interest disregarded only if MV of the asset
(when you acquired the interest) is <$500.

Assets of Non-Residents
Div. 136 Liable for CGT if there is disposal or deemed disposal of asset with the
necessary connection with Australia – refer p 5-12 for assets with
‘necessary connection’.

Sec 136-40 Non-resident becoming resident:


Where taxpayer is individual or company, there are rules relevant to CGT
assets owned just before becoming a resident, EXCEPT an asset:
 having the necessary connection with Australia; or
 was acquired before 20/9/85
The first element of the cost base and reduced cost base (at time taxpayer
became Australian resident) is MV at that time.

TD 2000/6 Non-resident bequeath:


Where NR bequeaths a CGT asset which does not have the necessary
connection with Australia to a resident beneficiary, the resident makes a
capital gain/loss if a CGT event later happens to it.

CGT Events:
Sec 104-5 Table of CGT events – refer p5-17

Which Entity Makes the Gains/Losses


Sec 106-35 Liquidation:
Acts done by liquidator of a company is deemed to be done by the
company – so any capital gain/loss arises in the company.

Sec 106-50 Absolutely entitled beneficiaries:


If beneficiary is absolutely entitled to a CGT asset as against the Trustee,
an act done by the trustee in relation to the asset is deemed to be done by
beneficiary – so any capital gains/losses goes to the beneficiary

Sec 106-60 Security holder:


Act done by entity in relation to CGT asset for purpose of enforcing or
giving effect to a security, charge or encumbrance held by entity over
asset as if act was done by person providing the security – eg. bank sells
house after property owner defaults on loan repayments, gain/loss made
by owner.

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Timing of Acquisitions and Disposals:
Refer to pg 9-14 for acquisition rules

Sec 109-5 (refer to table Compulsory acquisition:


pg 9-14) Acquisition is at the earlier of:
 when compensation was received;
 when acquirer became owner;
 when acquirer entered on the asset under powers conferred on the
person by relevant law; and
 when acquirer took possession under such powers.

Acquisition/Disposal under contract:


Time of acquisition or disposal is the time of making the contract.
Consider:
 taxpayer not required to report any capital gain or loss until an actual
change of ownership occurs, eg. at settlement
 when change in ownership takes place in later year, an earlier
assessment for the year in which the contract was made may have to
be amended.
 If contract is subject to a condition, it does not affect the time of the
contract being made, unless it is a condition precedent to the
formation of the contract – Case 24/94

Sec. 104-20(2) Lost or Destroyed:


If asset lost or destroyed – disposal when an amount is first received by
way of compensation.
If no compensation, the time the loss was discovered or destruction
occurred.

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CGT Exemptions and Concessions
Subdiv. 118-A Exemptions
Gains or losses on disposal are exempt for:
Sec 118-5(a) A car, motor cycle or similar vehicle

Sec 118-5(b) Disposal of valour or brave conduct awards provided the disposer did not
pay any consideration in respect of its acquisition.

Sec 118-10(1) & (2) Capital gain/loss from a collectable or interest in a collectable disregarded
if acquired for $500 or less.

Sec 118-10(3) Capital gain from PUA disregarded if acquired for $10,000 or less (from
1/7/98 for assets acquired before or after)

Sec 118-12 Disposal of an asset used solely to produce exempt income

Sec 118-13 Capital gain or loss made from CGT even happening re shares in a PDF is
disregarded.

Sec 118-15 Receipt of consideration in relation to the disposal of firearm under the
‘firearms surrender arrangements’

Sec 118-24 Capital gain/loss is disregarded if, at the time of the CGT event, the asset
is:
a) your plant; or
b) if you are a ptnr, plant of the ptsp; or
c) if you are absolutely entitled to the asset as against the trustee of a
trust (not regarding any legal disability), plant of the trustee.

Sec 118-25 Where asset disposed of was trading stock immediately before disposal.

Sec 118-30 Gain/loss from CGT event relating to interest in the copyright in a film is
disregarded if:
a) amount is included in assessable income under s26AG (about film
proceeds)
b) an amount would have been included apart from s23H (about
exempting film proceeds).

Sec 118-35 Where amount received for results of R&D activities or for having
incurred R&D expenditure.

Sec 118-37(1) Capital gain/loss made from CGT event is disregarded for:
 compensation or damages received for any wrong or injury suffered in
occupation
 compensation or damages for any wrong, injury or illness suffered
personally;
 gambling, game or competition with prizes…etc

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Sec 118-37(2) Capital gain as result of receiving an amount as reimbursement or
payment of your expenses under one of these schemes:
 General Practice Rural Incentives Program
 Sydney Aircraft Noise Insulation Project
 M4/M5 Cashback Scheme.

Sec 118-40 Capital loss lessee makes from expiry, surrender, forfeiture or assignment
of a lease disregarded IF lessee did not use lease solely or mainly for
purpose of producing assessable income.

Sec 118-42 If:


a) own land on which there is building;
b) subdivide the building into stratum units; and
c) transfer each unit to the entity who had the right to occupy it just
before the subdivision
capital gain or loss from transfer of units disregarded.

Sec 118-45 Gain/loss from sale, transfer or assignment of rights to mine in area in
Australia disregarded if you have exempt income for the whole year from
the sale, transfer or assignment.

Sec 118-55 Gain/loss from contract you entered into solely to reduce risk of financial
loss suffered from currency exchange rate fluctuations disregarded if
contract relates to:
 liability you have to make payment under another contract;
 a CGT asset that is a right you acquire before 20/9/85 to receive
money under another contract.
Sec 118-60 Where person dies after 30/6/94 and disposes of asset under the Cultural
Bequests programme
Division 50 No capital deemed to have accrued if income of taxpayer for the year of
income is exempt by virtue of a ‘relevant exempting provision’.
Main Residence Exemption
Sec 118-110 Capital gains/losses from a CGT event relating to a CGT asset that is a
dwelling or the taxpayer’s ownership interest in it must be
disregarded if certain conditions are satisfied.

Sec 118-190 Partial Exemption:


CGT main residence exemption reduced if dwelling used for income-
producing purposes for part or all of a period and interest on money
borrowed to acquire the dwelling would have been deductible.
BUT have to meet conditions:
 CGT event happens to a dwelling or the taxpayer’s ownership interest
in it.
 But for this section, the taxpayer would make a lesser capital gain/loss
than if Subdiv. 118-B had not applied, or would make no capital
gain/loss from the event, because dwelling was the main residence of
the taxpayer or of another person during a period.

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 Dwelling was used for income-producing purposes during all or part
of year
 Taxpayer had incurred interest on money borrowed to acquire the
dwelling or an ownership interest in it, such interest would have been
deductible.

Sec 118-150 Deemed main residence:


Dwelling can be deemed the main residence for a period prior to the
dwelling actually becoming the main residence of taxpayer where:
 Taxpayer erects a dwelling on vacant land;
 Taxpayer completes the construction of a partly completed dwelling;
 Taxpayer demolishes a dwelling or partly erected a dwelling and
erects a new dwelling; or
 Taxpayer repairs or renovates a dwelling.
The taxpayer can make an election which will extend for a maximum of 4
years, the time during which the taxpayer is taken to have used the
dwelling as his/her main residence.

BUT for this to work, dwelling must become taxpayer’s main residence as
soon as practicable after dwelling was erected AND continues to be so for
at least 3 months.

Change of residence:
Sec 118-140 Where taxpayer owns two dwellings at time of changing homes both
dwellings are taken to be main residence for limited period:
Sec 118-140(2)  Dwelling that was disposed of was the main residence of taxpayer for
continuous period of at least 3 months during 12 months before time
of disposal
 Dwelling not used for income producing purposes during that 12
month period, other than during period in which it was taxpayer’s
main residence.
The period allowed for two main residences is maximum of 6 months.

Absences:
Sec 118-145(1) Taxpayer can elect dwelling to be his/her main residence even though
taxpayer has ceased to use it as such.
Where there is NO election, dwelling will be subjected to CGT on pro-
rated basis.
Sec 118-145(2) Election may be made irrespective of period of time for which taxpayer
ceases to use dwelling as main residence, EXCEPT where there is
income-producing use, there is a 6 year limitation.

Sec 118-160 Destruction:


CGT exemption where main residence accidentally destroyed and the
taxpayer sells the land on which the dwelling was located, IF the taxpayer
has not erected another dwelling on the land.

Sec 118-170 Spouse with different main residences:


Taxpayer can nominate one of the residences as a main residence.

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BUT spouse cannot live separately on a permanent basis.

Sec 118-170(3) & (4) If separate dwellings are nominated, can do if taxpayer has a 50% interest
or less in the dwelling.

Sec 118-170(4) HOWEVER, if taxpayer or spouse has more than 50% interest in
nominated dwelling, will be deemed to have had the dwelling as a main
residence for half the period.

Sec 118-192 When main residence first used for income producing purposes:
so that full exemption does not apply, the taxpayer will be taken to have
acquired dwelling at that time for its MV.

Sec 118-195 Deceased estate:


Gains and losses exempt for beneficiary or trustee of a deceased estate
relating to a dwelling or taxpayer’s ownership interest in it IF:
 Taxpayer is an individual;
 Interest passed to taxpayer as a beneficiary, or taxpayer owned it as
trustee of estate
 Gain/loss arises out of one of the CGT events
 Certain conditions satisfied re use of property before and after death.

Conditions:
 If acquired PRE-CGT and the dwelling was main residence just before
death and was not then being used for producing income – taxpayer’s
ownership interest will end within two years of deceased’s death.
 If acquired POST-CGT and the dwelling was, from time of death until
ownership interest ends, the main residence of:
 Spouse of deceased immediately before death; or
 An individual who had the right to occupy the dwelling
under the will; or
 Beneficiary who brought about the CGT event
The exemption will apply.

Reduction of capital gain otherwise assessable


Sec 118-20(1) Capital gain from CGT even reduced if, because of the event, a provision
of the Act (other than CGT part) includes and amount in:
 Your assessable income or exempt income;
 If you are a partner in a ptsp, the assessable income or exempt income
of the ptsp.
Capital gain is reduced by the amount included in assessable or exempt
income – cannot create a loss.

95
Cost Base and Reduced Cost Base
Capital Gain = Capital proceeds – cost base of asset
Capital Loss = Reduced cost base – capital proceeds

Capital Proceeds
Sec 116-20(1) Capital proceeds is the amount of money and the MV of property received
or entitled to be received as a result of the disposal.

Sec 103-10 There is an entitlement to receive if the taxpayer is entitled to have the
money or property applied for the benefit, or in accordance with the
directions, of the taxpayer.

Sec 116-30 Capital proceeds DEEMED to be MV where, there is a CGT even AND:
 No capital proceeds received;
 Proceeds cannot be value; or
 The disposer and recipient were not dealing at arm’s length.

Sec 116-40 Apportionment rule

Sec 116-45 An adjustment will be made where it turns out that some or all of the
capital proceeds is not received and not likely to be received.
Adjustment is NOT available if:
 The deemed MV rules are attached; or
 If the non-receipt of consideration is due to an act or omission by the
taxpayer or associate or if the taxpayer has not taken all reasonable
steps to secure payment
Sec 116-50 The capital proceeds are reduced by any part of those proceeds that are
repaid by the taxpayer and by any compensation paid by the taxpayer that
can reasonably be regarded as a repayment of part of the proceeds.
Sec 116-55 Capital proceeds are increased if entity acquiring the asset acquires it
subject to a liability by way of security over asset. The proceeds are
increased by amount of liability that the other entity assumes.

Capital Proceeds modification rules:


Market value substitution rule
Sec 116-30(1)  No capital proceeds – where taxpayer received no capital proceeds
from CGT event, he/she is taken to have received the MV of asset
Sec 116-30(2)  Capital proceeds are replaced with MV if:
 Some or all of these proceeds cannot be value; or
 The proceeds are more or less than the MV and the parties
did not deal at arm’s length or the CGT event is the redemption,
release, abandonment, surrender, forfeiture or cancellation of the
asset.
Sec 116-40 Apportionment Rule:
Where proceeds are received in connection with a transaction that relates

96
to more than one CGT event, the proceeds from each event are so much of
the payment as is reasonably attributable to each event.

Sec 116-45
Non-receipt rule:
Capital proceeds reduced if:
 Taxpayer is not likely to receive some or all of the proceeds
 It is not because of anything the taxpayer has done or omitted to do;
and
 Taxpayer took all reasonable steps to get unpaid amount paid.
Proceeds are reduced by the unpaid amount. If unpaid amount later
received, it is included and the CGT consequences re-calculated.
Sec 116-50
Repaid rule
Capital proceeds reduced by:
 Any part of them that the taxpayer repays or
 Any compensation the taxpayer pays that can be regarded as
repayment.
Capital proceeds NOT reduced by any part of payment which is
deductible.
Sec 116-55
Assumption of liability rule:
Capital proceeds are increased if another entity acquires asset subject to a
liability by way of security over the asset.
Increased by amount of liability the entity assumes.

Cost Base
Elements of cost base:
Sec 110-25(1) 5 elements:

Sec 110-25(2) 1) money paid or required to be paid in respect of acquiring asset, or


market value of any property given. [per s103-15, taxpayer deemed
required to pay money even though not required to until later or it is
payable in instalments]

Sec 110-25(3) 2) Amount of incidental costs of acquisition or that relate to a CGT event
that happens in relation to the asset.

Per sec 110-35, it incidental costs include:


 Remuneration for services of surveyor, valuer, auctioneer,
accountant, broker, agent, consultant or legal adviser
 Costs of transfer
 Stamp duty or other similar duty
 Costs of advertising to find seller or buyer
 Costs re making of any valuation or apportionment for
purposes of CGT provisions in respect of the acquisition or
disposal.
Sec 110-25(4)
3) For CGT assets acquired on or after 21/8/91, certain non-capital costs

97
of ownership may be included if not otherwise deductible under
another provision:
 Interest on money borrowed to acquire asset
 Repairs and maintenance
 Insurance premiums
 For land – rates and land taxes;
 Interest on money borrowed to refinance the money
borrowed to acquired the asset
 Interest on money borrowed to finance capex incurred to
increase asset value.
DOES NOT include cost of obtaining loan per TD 93/1
[note: this element is NOT indexed, per s114-1 and DOES not apply to
Sec 110-25(5)
PUA or collectables – s108-17 and 108-30]

4) Capital expenditure on enhancing the value of the asset PROVIDED it


Sec 110-25(6)
is reflected in the state or nature of the asset at time of disposal

5) Capital expenditure on establishing, preserving or defending the


Sec 110-40
taxpayer’s title to, or right over, the asset.

Expenditures NOT included in Cost Base:


For assets acquired before 13/5/97:
Expenditure DOES NOT form part of the 2nd or 3rd element of the cost
base to the extent that the taxpayer can deduct it.
Expenditure DOES NOT form part of the cost base to the extent that the
taxpayer receives a recoupment of it – except so far as it is included in
Sec 110-45
taxpayer’s income.

For assets after 13/5/97:


 Expenditure does not form part of cost base to the extent that the
taxpayer has deducted or can deduct it (provided the deduction has
been reversed by an amount being included in income)
 Expenditure does not form part of cost base if taxpayer has received as
recoupment of it, except so far as it is included in assessable income.
 Cost base reduced by amount deductible for capital expenditure
incurred by another entity in respect of the CGT asset.

Indexation of cost base:


Pre 21/9/99:
Sec 110-25(7) Cost base of CGT asset acquired at or before 21/9/99 includes indexation
of the elements of the cost base.
Indexation is for:
 Individual
 Complying super fund
 Trust.

Sec 114-1 Expenditure included in each element (EXCEPT third element) may be
indexed.

98
Sec 114-10(1) Can only index expenditure in the cost base if you had acquired the asset
at least 12 months before time of CGT event.

Sec 110-25(8) Post 21/9/99


For a CGT event occurring after 21/9/99, the cost base includes
indexation only if the above entities chooses that the cost base includes
indexation.

Indexation factor:
Sec 960-275(2) Quarter in year of disposal (regardless of when consideration paid) /
[all other elements] quarter in year of expenditure arose (note: NOT when paid)
Sec 960-275(3)
[1st element only]

Separate parts of asset:


Where two or more parts of the asset were acquired at separate times,
their cost bases are indexed separately.

Reduced Cost Base


Sec 110-55(1) 5 elements:

Sec 110-55(2) 1) money paid or required to be paid in respect of acquiring asset, or


market value of any property given. [per s103-15, taxpayer deemed
required to pay money even though not required to until later or it is
payable in instalments]

Sec 110-55(2) 2) Amount of incidental costs of acquisition or that relate to a CGT event
that happens in relation to the asset.

Per sec 110-35, it incidental costs include:


 Remuneration for services of surveyor, valuer, auctioneer,
accountant, broker, agent, consultant or legal adviser
 Costs of transfer
 Stamp duty or other similar duty
 Costs of advertising to find seller or buyer
 Costs re making of any valuation or apportionment for
purposes of CGT provisions in respect of the acquisition or
disposal.
Sec 110-55(3)
3) any amount included in the taxpayer’s assessable income for any
income year because of a balancing adjustment for the asset
Sec 110-55(2)
4) Capital expenditure on enhancing the value of the asset PROVIDED it
is reflected in the state or nature of the asset at time of disposal
Sec 110-55(2)
5) Capital expenditure on establishing, preserving or defending the
taxpayer’s title to, or right over, the asset.

99
What does not form part of RCB?
Sec 110-55(4)  Expenditure does not form part of RCB to the extent that the taxpayer
has deducted or can deduct it (provided the deduction has been
reversed by an amount being included in income)
Sec 110-55(6)  Expenditure does not form part of RCB if taxpayer has received as
recoupment of it, except so far as it is included in assessable income.
Modifications to Cost Base
Split, changed or merged assets:
Sec 112-25 Where:
 Two or more assets have merged;
 An asset has been divided into two or more assets; or
 Asset has been changed, in whole or in part, into an asset of a different
nature
Then if any value of these assets is attributable to the original asset, its
cost base will include cost base of original asset calculated as if there had
been a disposal of the original asset at time when event occurred. (ie.
calculate each element of CB and RCB of original asset at time of change;
apportion in a reasonable way each element to each new asset)

Sec 112-20 Market value substitution rule:


First element of CB and RCB is its MV if:
 Taxpayer did not incur expenditure to acquire the asset
 Some or all of the expenditure the taxpayer incurred cannot be valued
 Taxpayer did not deal at arm’s length with other entity.

EXCEPTION:
 Right to receive ordinary or statutory income from trust
 Decoration awarded for valour or brave conduct
 Contractural or other legal or equitable right
 Rights to acquire shares, options to acquire shares; units or options to
acquire units
 Share in a company (issued by the company and taxpayer did not pay
for it)
 Unit in a unit trust (issued w/o paying for it)

Sec 112-30 Disposal of Part of Asset:


Taxpayer only expended part of expenditure in acquiring asset, the first
element is that part of the expenditure reasonably attributable to the
acquisition of the asset, ie.
CB x (Proceeds for CGT event to part/capital proceeds +MV of remainder
of asset)

Deceased Estate:
Sec 128-10 When a taxpayer dies, a capital gain or loss from a CGT even happening
to a CGT asset the taxpayer owned just before death is ignored.

Sec 114-10(6) The 12 month indexation rule applies to the legal representative or
beneficiary as if that entity had acquired the asset when the taxpayer

100
acquired it.

Sec 128-15(4) If pre-CGT asset in hands of deceased – 1st element of CB or RCB to


the legal representative or beneficiary at time of acquisition by them is the
MV of asset on the day of death.
If post-CGT asset in hands of deceased – 1st element of CB or RCB to
legal representative or beneficiary is the deceased’s cost base or RCB on
day of death.

101
Calculation of Gains and Losses
Capital Proceeds – Cost Base of Asset = Capital Gain
Reduced Cost Base – Capital Proceeds = Capital Loss

Sec 118-20 Where an amount is assessable by virtue of the CGT provisions and also
under another provision of the ITAA, the amount of capital gain is
reduced by the amount assessable under the other provision.

NET Capital gains and Losses


Sec 102-5(1) If a net capital gain accrues to a taxpayer, that amount is included in the
assessable income for the year.

Sec 102-5(2) If a net capital loss accrues, it is not deductible, rather it is carried forward
for purpose of calculating the net capital gain or loss in the next year (see
below)
.
Prior to 21 September 1999
Sec 102-5(1) 1) Add up capital gains and losses during year
2) Subtract capital losses from gains – if zero, then no gain
3) Reduce amount further by applying any unapplied net capital losses
from previous years – if zero, then no gain
4) Result is net capital gain.

Post 21 September 1999


1) Reduce capital gains by capital losses made during the year
2) Apply any unapplied net capital losses from previous years to reduce
amount
3) Reduce by discount percentage each amount remaining after step 2
(see below)
4) If any gains qualify for small business concessions, apply the
concessions
5) Sum of gains above is your net capital gain.

Net capital losses:


Sec 102-10(2) Net capital loss incurred if sum of capital losses incurred during the year
exceeds sum of capital gains.

Sec 102-15(1) Where two or more net capital losses, apply the losses in order in which
they were incurred

Sec 102-15(2) Net capital losses can only be applied to extent that it has not already been
applied in an earlier income year

Sec 102-15(3) Unapplied amounts can be carried forward to next year.

For Corporate taxpayers:


Carry forward losses:
Sec 165-96 For 97/98 and later years, cannot apply prior year net capital losses
UNLESS:

102
 Same people owned the company during both capital loss year and
capital gain year;
 No person controlled company’s voting power at any time during the
gain year who did not also control it during the whole of loss year.
Or company has carried on same business and not commenced additional
business or new transactions.

Transfer of capital losses:


Sec 170-105 Resident company which incurs a net capital loss can transfer the loss to
another resident company in the same wholly-owned group where:
 The gain company has a net capital gain in income year;
 Loss company is not a dual resident investment company in either the
loss or transfer year; and
 If the loss year and transfer year are the same – loss company is a
group company
 If transfer year is later than loss year – loss company is a group
company in loss year, transfer year and all intervening years.
Sec 170-145(1)
Amount transferred cannot exceed amount of loss company’s net capital
loss that, apart from the transfer, loss company would have carried
forward to the next year.
Sec 170-150(1)
Transfer must be made by written agreement which must:
Sec 170-150(2)
a) specify income year of transfer
b) specify amount transferred
c) signed by both public officers
d) made on or before day of lodgement of ITR of income company.
Sec 170-125(1)
If loss company receives consideration for transferred amount:
a) consideration is not assessable income nor exempt income; and
b) loss company does not make capital gain because of the consideration
Sec 170-125(2)
If income company gives consideration for the transferred amount:
a) gain company cannot deduct consideration; and
b) gain company does not make capital loss because of the consideration.

Discount Capital Gain


A discount capital gain is:
Sec 115-10 a) made by individual, complying super fund, or trust
Sec 115-15 b) result from CGT event happening after 21/9/99
Sec 115-20 c) worked out w/o cost base being indexed
Sec 115-25 d) result from CGT event happening to CGT asset owned by taxpayer for
at least 12 months.

Discount percentage:
Sec 115-100 a) 50% of gain made for individuals or a trust
b) 33.33% of gain made by complying superannuation entity or by life
insurance company from a CGT asset that is a virtual PST asset.

103
When capital gain is NOT a discount gain:
Sec 115-40 Capital gain NOT discount gain if resulted from a CGT even that occurred
under an agreement the taxpayer made within 12 months of acquiring the
asset.

Sec 115-45 Capital gain NOT discount gain if:


 CGT even happened to share in a company or an interest in a trust;
and
 The total of the cost bases of the assets acquired by the company or
trust less than 12 months before the CGT event is more than 50% of
the total of the cost bases of the assets of the company or trust at that
time.

Sec 115-25(3) When CGT events cannot give rise of discount capital gain – refer pg
5-76
D1, D2, D3, E9, F1, F2, F5, H2, J2, J3

Capital Gain Averaging Provision – Individuals ONLY


Refer to pg 9-40 for formula.

The rules will apply where a trustee pays tax on behalf of a beneficiary or
there is no beneficiary presently entitled to the income.

104
Rollovers
Disposal or Creation of Assets in a Wholly Owned Company by Individual or Trustee
Sec 122-15 Roll-over relief applies when a trigger event occurs to a CGT asset of the
taxpayer. The trigger event is when the taxpayer disposes of an asset
to a company and are specified as:
 Event A1 – disposal of CGT asset or all of assets of a business to the
company – s104-10
 Event D1 – creating contractual or other rights in company – s104-35
 Event D2 – granting an option to the company – s104-35
 Event D3 – granting company right to income from mining – s104-35
 Event F1 – granting lease to company, or renewing or extending it –
s104-35

Conditions:
Sec 122-25(1)  Must own all shares in the company just after the time of the trigger
event
Sec 122-25(5)  Ordinary income and statutory income of company must not be
exempt from tax because of Div. 50 for the income year of trigger
event.
Sec 122-25(6)  For an individual – must satisfy one of the items in table of the section
(residency requirements).

Consideration for disposal or creation:


Consideration received for trigger event MUST BE ONLY:
Sec 122-20(1)  shares in the company
 where CGT asset, or all assets of the business are transferred to
company – shares in company and the company undertaking to
discharge one or more liabilities in respect of the assets of the business
(see below)

Sec 122-20(2) The shares CANNOT be redeemable shares

Sec 122-20(3) The MV of shares received must substantially be the same as:
 for a disposal case – MV of assets transferred less any liabilities the
company undertakes to discharge in respect of the assets.
 In any other cases – MV of assets created in company.
Sec 122-20(4) Any contingent liability inherent in a transferred asset (eg. contingent tax
liability) is ignored in comparing MV’s of the assets disposed of and the
shares received.

Restrictions where company assumes liabilities:


Sec 122-35 Where taxpayer disposes of CGT asset and company assumes one or more
liabilities, roll-over only available if the amount of liabilities does not
exceed:
 MV of asset if asset acquired by transferor pre 20/9/85; OR
 Sum of MV’s of precluded assets and cost bases of other assets

105
(precluded assets are car, motorcycle, trading stock, etc).
Sec 122-37(2)
Where taxpayer disposes all assets of business – liability incurred for
purposes of business is NOT a liability in respect of a specific asset/s of
the business. It is taken to be liability re all assets of the business.
Sec 122-37(3)
If liability is in respect of 2 or more assets – apportion the liability.

Consequences of roll-over:
Refer to pg 5-84

Where rollover is NOT available:


Sec 122-25(2)  Roll-over relief does not apply to disposal or creation of these assets:
 PUA and collectables
 Decoration awarded for valour or brave conduct
 Car, motor cycle
 Asset that becomes trading stock just after disposal or
creation.
 Some precluded assets cannot be rolled over unless they are disposed
of as part of the disposal by taxpayer of all assets in the business – ie.
cannot be rolled over individually.
Sec 122-25(3)
 Precluded assets are car, motorcycle, trading stock, etc.

Partnership Asset Rolled over to Wholly Owned Company


Refer pg 5-89

Transfer of Assets Between Group Companies in the Same Wholly Owned Group
Wholly owned group:
Sec 975-500 Company will be in the same wholly-owned group if:
 One of the companies is a 100% subsidiary of the other company or
 Each of the companies is a 100% subsidiary of the same third
company.

Requirements for a roll-over relief:


Sec 126-50(1)  Originating and recipient company must members of the same wholly-
owned group at time of trigger event
Sec 126-50(2)  CGT asset must not be trading stock of recipient company just after
trigger event
Sec 126-50(3)  If roll-over asset is a right, option or convertible note and the recipient
company acquires another CGT asset by exercising right or option or
by converting the convertible note, other asset cannot become trading
stock of the recipient company just after acquisition
Sec 126-50(4)  Ordinary and statutory income of recipient company must not be
exempt from tax due to Div. 50 for the income year of trigger event

Sec 126-55 When do roll-over provisions apply?


There is roll-over if:
a) either:

106
 the trigger event would have resulted in the originating
company making a capital gain or making no capital loss and not
being entitled to a deduction; or
 originating company acquired the roll-over asset pre
20/9/85; AND
b) the originating company and recipient company both choose to obtain
it.

Sec 126-50(5) Residency requirements for roll-over:


Transferor – resident; Recipient – Resident
Then does not matter what the roll over asset is.

Transferor – NR; Recipient – Resident


Asset must have necessary connection with Aust. Just before trigger event
(for disposal case) and just after that time (for creation case.

Transferor – Irrelevant; Recipient – NR


Asset must have necessary connection with Aust. Just before trigger event
(for disposal case) and just after that time (for creation case.

Consequences of roll-over:
For originating company in all cases:
Sec 126-60(1) Capital gain or loss from trigger event disregarded.

For recipient company (disposal case):


Sec 126-60(2)  if originating company acquired asset post-CGT, 1st element of CB
(for recipient company) is asset’s CB or RCB in the hands of
originating company at time of acquisition.
Sec 126-60(3)  If roll-over asset acquired pre-CGT, the recipient company taken to
have acquired it pre-CGT
Sec 126-60(4)  If PUA involved, then recipient company taken to have acquired a
PUA.

Sec 126-60(5) For recipient company (creation case):


 First element of CB and RCB is:
 Event D1 – incidental costs the originating company
incurred
 Event D2 – expenditure incurred to grant option
 Event D3 – expenditure incurred to grant the right
 Event F1 – expenditure incurred on grant, renewal or
extension of lease.

Roll-overs on certain liquidations: sec 126-85

When companies cease to be related – roll-over relief lost:


Sec 104-175 Withdraws benefit of company roll-over relief if:
a) an asset was transferred to another group company by way of a roll-
over or a series of roll-overs under subdiv. 126-B.
b) recipient company is not the ultimate holding company re disposal

107
c) company ceases, at some time, when it still owns the roll-over asset, to
be a subsidiary in relation to the wholly-owned group of transferor or
first transferor if a series of roll-overs involved; and
d) the cessation is not a sub-group break up.

108
Small Business Concessions
General Conditions
Conditions for entitlement to concessions:
Sec 152-15  Net value of assets owned by business entity and related entities must
be $5m or less
Sec 152-35  CGT asset involved must be active asset (see below)
Sec 152-50 to 152-60  If asset is a share or an interest in a trust, there must be a controlling
individual (of company – right to exercise at least 50% of voting
power and right to receive at least 50% of dividend; trust –
beneficially entitled to at least 50% of income and capital of trust) just
before the CGT event and the business entity must be a CGT
concession stakeholder (ie. controlling individual of company or trust;
for company – spouse of controlling individual if spouse has legal or
equitable interests in shares; for trust – spouse of controlling
individual if spouse is beneficially entitled to income or capital of
trust) in the company or trust.

Net value of assets:


Sec 153-15 Net value of assets test is satisfied if, just before the CGT event, the sum
of the net value of CGT assets owned by:
 Small business entity;
 Entities connected with the small business entity (see below); and
 Small business CGT affiliates (see below) of the small business entity
or entities connected with such affiliates
Does not exceed $5m.

Sec 152-20(1) The net value of the CGT asset = Sum of MV’s of assets – sum of
liabilities of entity relating to the assets.
[NOTE: ensure that liabilities taken into account relate to the specific
assets included].

Assets NOT counted towards $5m:


Sec 152-20(2)(a) Shares, units or other interest (except debt) in another entity connected
with the particular person or with a small business CGT affiliate of that
person.

Sec 152-20(2)(b) If the entity is an individual,


 Assets being used solely for personal use and enjoyment of entity or
entity’s small business CGT affiliate
 Dwelling of the individual or ownership interest in such dwelling if
individual was using dwelling to produce assessable income but does
not satisfy s118-190(1)(c) re deductibility of interest.
 Right to any allowance, annuity or capital amount payable out of a
super fund or an ADF; and
 Right to an asset of a super fund or of an ADF
 Policy of insurance on individual’s life.

109
Sec 152-20(3) Net value of CGT asset of small business CGT affiliate – disregard assets
of affiliate not used, or held ready for use in carrying on a business that
the entity carries on.

Sec 152-25 Small business CGT affiliate:


Is a person who:
 Is your spouse or child under 18 years; or
 Person acts or could reasonably be expected to act, in accordance with
your directions or wishes or in concert with you.

Sec 152-30 Entity connected with another entity:


Requires that:
 Either entity controls the other in the way described in section; or
 Both entities are controlled in that way by same 3rd party.
[basically at least 40% of any distribution of income or capital; or voting
power in company; for trusts – entity has power to determine manner in
which trustee exercise power to may payment, owning interest in
distributions up to maximum % trustee is empowered to pay]

Active Asset Test:


Sec 152-40(3) CGT asset is active asset if you own it and:
 Use it, or hold it ready for use, in course of business; or
 It is an intangible asset that is inherently connected with a business
that you carry on
 It is used or held ready for use, in the course of business carried on by:
 Your small business CGT affiliate;
 Another entity connected with you.
 It is either a share in a company that is a resident or an interest in a
trust that is a resident for the income year in which it occurs; and
 Total of:
 MV’s of active assets of company or trust; AND
 Any capital proceeds that company or trust received,
during 2 years before that time, from CGT events happening to its
active assets and the company or trust holds in the form of cash or
debt pending the acquisition of new active assets;
Is 80% or more of MV of all assets of company or trust.
Sec 152-40(4)
CANNOT be active assets:
 Interests in an entity that is connected with you, other than shares and
interests covered above
 Shares in companies, other than shares covered above
 Interest in trusts, other than interests covered above.
 Financial instruments (loans, debentures, bonds, promissory notes,
futures contracts, forward contracts and right or option in respect of a
share, security, loan or contract)
 An asset whose main use in the course of carrying on business
mentioned above is to derive interest, an annuity, rent, royalties or

110
foreign exchange gains, UNLESS:
 Asset is an intangible asset and has been substantially
developed, altered, or improved by you so that its MV has been
substantially enhanced; or
 Main use for deriving rent only temporary.

Small Business 15 Year Asset Exemption


Sec 152-105 Applies where:
 General conditions are satisfied for the gain
 Individual continuously owned the CGT asset for the 15yr period
ending just before CGT event;
 If CGT asset is a company share or interest in trust – company or trust
has controlling individual at all times during the whole period the
taxpayer owned the asset. HOWEVER, does not have to be same
controlling individual.
 At time of CGT event, individual is either:
 55 yrs of age or over and event happens in connection with
retirement; or
 permanently incapacitated.

If conditions satisfied, individual can disregard any capital gain arising


from the CGT event.

Small Business 50% Active Asset Concession


Sec 152-205 Amount of net capital gain is reduced by 50% if the general conditions are
satisfied for the gain.

Sec 152-210(1) The capital gain reduced by 50% may also qualify for the small business
retirement exemption and/or a small business rollover.

Sec 152-210(2) If they qualify, you can the order in which to apply them.

Small Business Retirement Exemption


Need to satisfy general conditions for exemption to apply.
ALSO
Sec 152-305 If taxpayer under 55 just before receiving capital proceeds from a CGT
event, the gain must be rolled over as ETP in accordance with this section.
 Ie. s27D must require amount to be taken to have been expended in
making payment to:
 complying super fund for provision of super benefits
 complying ADF
 RSA held by taxpayer.

If taxpayer is 55 or older, the requirement does not apply.


Sec 152-305(2) Company or trust can choose to disregard all or part of a capital gain if:
 General conditions satisfied
 Controlling individual test satisfied

111
 Company or trust conditions (s152-325) satisfied.

112
Small Business Asset Rollovers
Sec 152-410 Can choose to obtain a roll-over for a gain if:
 General conditions satisfied
 Within period starting one year before and ending 2 years after the last
CGT event during the year for which you choose the roll-over, you
choose on or more CGT assets as replacements
 Replacement asset satisfies conditions in s152-420.

If you choose the roll-over:


Sec 152-415 So much of the capital gain that would have remained apart from the roll-
over as does not exceed the total of the 1st and 2nd elements of the cost
base of the replacement asset is ignored.

Sec 152-420 Conditions of a replacement asset:


Taxpayer must acquire asset during the period:
 Starting 1 yr before; and
 Ending two years after
The occurrence of the last CGT event in the income year for which the
taxpayer obtains the roll-over.

Replacement asset must be an active asset:


 When acquired; or
 By end of two years after last CGT event during the income year for
which the taxpayer obtains the rollover.

113
Transitional Provisions
Change in Majority Underlying Interest
Sec 149-30(1) Deemed acquisition:
Asset acquired pre-CGT stops being pre-CGT at earliest time when
majority underlying interest in asset not had by ultimate owners who had
MUI in asset before 20/9/85

Sec 149-30(2) Where asset stops being pre-CGT 1st element of CB is asset’s MV at that
time.

Majority Underlying Interest:


Sec 149-15(1) Consists of:
 >50% of beneficial interest that ultimate owners have (directly or
indirectly) in asset; and
 >50% of beneficial interest that ultimate owners have (directly or
indirectly) in any ordinary income that may derive from the asset.

Sec 149-15(2) Underlying interest in a CGT asset is a beneficial interest that an ultimate
owner has (directly or indirectly) in asset or any ordinary income derived
from asset.

Sale of Pre-CGT Interest in Interposed Entity


Refer pg 9-61

114
PARTNERSHIPS

Definition of Partnership
Sec 995-1(1) or s6(1) Partnership is an association of persons carrying on business as partners or
in receipt of ordinary income or statutory income jointly, but does not
include a company.

TR 94/8 Indicators of existence of ptsp include:


 mutual assent and intention of parties (this is the essential element per
Jolley v. FCT)
 joint ownership of business assets
 registration of business nature
 joint business account and power to operate it
 extent to which parties are involved in conduct of business
 extent of capital contributions
 entitlements to a share of net profits
 business records
 trading in joint names and public recognition of ptsp
 sharing of contributions to assets and capital
 joint leasing or ownership of business premises
 readiness with which partners’ respective financial interests can be
ascertained; and
 evidence of drawings by partners against their respective share of ptsp
profits.

United Dominions Corp Ptsp vs. Joint Venture:


Ltd v. Brian Pty Ltd A partnership is an association of persons who engage in a common
undertaking for profit. A JV is an association of those who do so in order
to generate a product to be shared among participants.
Also refer pg 11-3

Taxing Partners:
Resident Partners:
Sec 92(1)(a)  include in assessable income their individual interests in net income of
ptsp
Sec 92(2)(a)  claim deduction for individual interests in ptsp loss
Sec 92(3)(a)  include in exempt income their individual interests in exempt income
of ptsp.

Non-Resident Partners:
Sec 92(1)(b)  include in assessable income their individual interests in net income of
ptsp that is sourced in Australia
Sec 92(2)(b)  claim deduction for individual interests in ptsp loss sourced in
Australia
Sec 92(3)(b)
 include in exempt income their individual interests in exempt income
of ptsp sourced in Australia.

115
Calculating Partnership Net Income or Loss
WIP Payments
Stapleton v. FCT; FCT v. Payment received by a retired partner on account of WIP unbilled at time
Grant & Ors of retirement is assessable income in hands of retired partner.

Dividends
Sec 160AQT Franked dividends received by ptsp included in assessable income and is
grossed up to include the company tax attributable to the dividend.

Sec 160AQT(1) Gross up amount = Class C franked amount x 36/64 (for 30/6/00)
Gross up amount = Class C franked amount x 34/66 (for 30/6/01)

Sec 160AQZ Imputation credit provided where assessable income includes the ‘grossed
up’ amount. Rebate is available to each partner’s share of the
imputation credit.

Partners’ Salaries
Ellis v. Joseph Ellis & Co Partner cannot be employee of a partnership so a partner salaries cannot
be a deduction from ptsp income.

IT 2218 Any partner salaries paid are treated as entitlement to allocation of profits
prior to general division among partners.

Interest Payments
Interest on external borrowings to reduce capital deductible where
borrowing by ptsp is for permitting certain amounts of ptsp capital to
be returned to existing partners.

Roberts and Smith Interest on loan deductible to ptsp where loan used to replace working
capital used in business carried on by ptsp.

TR 95/25 PROVIDED the capital account reduced represents funds employed in the
ptsp business resulting from contributions or retention of earnings NOT
capital generated such as loan is used to replace partnership capital which
is represented by internally generated goodwill or unrealised revaluations
of assets.

TD 200/24 Interest incurred by partner on borrowings to pay personal income tax not
deductible.

116
Superannuation contributions
Partnership cannot claim deduction under s82AAC or s82AAT for
contribution to a superannuation fund in relation to a partner. BUT
the partner can claim deduction under s82AAT for personal super
contributions.

Sec 82AAT Partners total deduction must not exceed the lesser of:
 first $5,000 contributed + 75% of excess of total amount contributed
over $5,000
 partners aged-based limit for income year.

Payments to Relatives and Related Entities


Sec 26-35 Where ptsp makes payment or incurs liability to a person who is a
relative, or other person associated with a partner, which is an
unreasonable amount, the deduction may be reduced.

Calculation of Partners’ Taxable Income


Sec 92 Partnership loss not allowable to ptsp but is instead distributed to partners
in the year incurred.

Change in Partnership Structure


IT 2540 For admission of new partner:
Existing partners each dispose of part of their interest in the assets of the
ptsp for their share of the consideration paid by incoming partner. If
capital proceeds > cost base, then assessable gain will be taxed in hands of
partners.

For retiring partner:


Disposing of interest in ptsp asset, an assessable gain will arise if capital
proceeds > cost base.

117
TRUSTEES AND BENEFICIARIES

Present Entitlement and Legal Disability


Present Entitlement:
FCT v. Whiting; Taylor v. Conditions:
FCT  Beneficial interest in trust income must be indefeasible, and absolutely
vested in B, not contingent
 Beneficiary must be able to demand immediate payment of that
income, or would be able to except for a legal disability
 Trustee may properly reinvest, accumulate, capitalise or otherwise
deal with the distribution as B directs on his behalf.
 Income must be available for distribution to B in accordance with trust
law.

Deemed present entitlement:


Sec 95A(2) Where B has vested and indefeasible interest in income of a trust, B is
deemed to have a PE to the income even though B may not be able to
demand immediate payment.
Sec 101 Where T of a discretionary trust has discretion to pay or apply income to
or for the benefit of a B, B is deemed to be PE to the amount paid or
applied from the exercise of the discretion.

Legal disability:
Use ordinary meaning – person unable to give trustee an immediate valid
discharge in respect of a distribution of trust income (eg. minor, lunatics,
felons, undischarged bankrupt).

Trust Income
What is Taxed?
Sec 95(1) Net income = assessable income – allowable deductions
[calculated as though trustee is resident]

Dividends
Sec 160AQT Franked dividends received by trust included in assessable income and is
grossed up to include the company tax attributable to the dividend.

Sec 160AQT(1) Gross up amount = Class C franked amount x 36/64 (for 30/6/00)
Gross up amount = Class C franked amount x 34/66 (for 30/6/01)

Sec 160AQZ Imputation credit provided where assessable income includes the ‘grossed
up’ amount. Rebate is available to each beneficiary/trustee’s share of the
imputation credit.

Residency and Source


Div. 6 Where there is present entitlement, the beneficiary/trustee is assessed on:
 so much of that share of net income of trust estate as is attributable to
a period when the B was a resident; and

118
 so much of that share of net income of trust estate as is attributable to
a period when the B was not a resident and is also attributable to
sources in Australia.

Sec 95(2) If no presently entitled B’s, residency test applied to trust estate. Trust is
a resident if:
 a trustee is a resident during any time during the year
 the central management and control of the trust estate was in Australia
at any time during year of income.

Trust Losses
Sec 265-5 Change in ownership or control OR abnormal trading in trust units:
If there is a change in ownership or control OR an abnormal trading in
trust units, it:
 may be prevented from deducting its tax losses of earlier income
years; and
 may have to work out in a special way its net income and tax loss for
the income year; and
 may be prevented from deducting certain amounts in respect of debts
incurred in income year or earlier income years.
UNLESS trust is an excepted trust (refer pg 12-9).

Sec 269-15(1) What is abnormal trading?


Look at:
 Timing of trading, compared to normal timing for trading
 Number of units traded, compare to normal units traded
 Any connection between trading and other trading in units in the unit
trust; and
 Any connection between the trading and a tax loss or other deduction
of the trust.
Sec 269-20
 T knows or reasonably suspects that it is part of an acquisition of the
Sec 269-25 trust or merger of the trust with another trust
 There is an acquisition of 5% or more of the units in a single
Sec 269-30 transaction, except in case of wholesale widely held trust
 There is suspected acquisition of 5% or more of the units by a person,
or a person together with associates, where such trading is prompted
Sec 269-35 by availability of tax loss or other deduction
 Over any 60 day period, more than 20% of the units on issue are
traded.

Trust Loss Tests


Sec 269-55 50% Stake Test:
Trust satisfies the test if, at all relevant times during the test period:
 same individuals have fixed entitlements, directly or indirectly, to
more than 50% of the income of the trust; and
 same individuals have fixed entitlements, directly or indirectly, to
more than 50% of the capital of the trust.

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Sec 269-55(2)
For a widely held unit trust, the 50% stake test will be satisfied where it is
reasonable to assume that the requirements of the test are met.

Test period:
Is the beginning of the loss year, end of loss year and the time of
abnormal trading or change in ownership or control.

Subdiv. 269-F Same business test:


Test is satisfied if:
 at all times during the same business test period, the trust carries on
same business it carried on immediately before start of that period
(‘test time)
 at any time during the same business test period, trust does not derive
assessable income from business of a kind it did not carry on before
the test time or from a business transaction of a kind it had not entered
into before the test time
 before the test time, the trust does not start to carry on a business it
had not previously carried on or enter into a business transaction of a
kind it had not previously entered into, for the purpose of satisfying
the same business test; and
 where trust is seeking to deduct a current year loss, it does not, at any
time, in the same business test period, incur expenditure in carrying
on a business of a kind it did not carry on before the test time or incur
expenditure as a result of a business transaction of a kind it had not
entered into before the test time

Sec 267-30 Pattern of distribution test:


If the trust is not an excepted trust and it was, at any time in the test
period, a non-fixed trust and:
 in the income year, or within two months after its end; and
 in at least one of the six earlier income years,
the trust distributed income or capital.
The trust will pass the test which will allow it to access prior year tax
losses (sec 267-20) and claiming tax deductions (sec 267-25)

Subdiv. 269-D Pattern of Distribution test SATISFIED if, within 2 months of end of
income year:
 trust has distributed, directly or indirectly, more than 50% of every
‘test year distribution’ of income to the same individuals for their own
benefit; and
 trust has distributed, directly or indirectly, more than 50% of every
‘test year distribution’ of capital to the same individuals for their own
benefit (need not be same individuals as above).
Sec 267-35 The trust MUST NOT have been prevented from deducting the relevant
deductions in an earlier income year because of a failure to meet the
conditions in the patter of distribution test.
Sec 269-65(1)

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Test year distribution is:
Is total of all distributions of income made by trust in any of the following
periods, PROVIDED the period does not start more than 6 years before
the start of the income year:
a) the period from the start of the income year until 2 months after its
end.
b) If trust distributed income before the trigger year (ie. loss year
mentioned in s267-20 per s269-65(2)) – the prior income year that is
closest to the trigger year.
c) [if (b) does not apply] If the trust distributed income in the trigger year
– the trigger year
d) [if (b) and (c) do not apply] – the income year, closest to trigger year,
in which the trust distributed income;
e) each intervening year between the one in (a) and the one in (b), (c) or
(d).
Sec 269-70
If the share of income distributed to each individual varies from year to
year, then only the smallest percentage distribution is taken into account
for the purpose of test year distributions.
Sec 269-80
EXCEPTION: if there is a loss of entitlement to future distributions due to
death or marriage breakdown, the income or capital received by this
individual is ignored in determining test year distributions.

Subdiv. 269-E Control test:


Sec 267-45 Requires that no group begin to control the trust, whether directly or
indirectly, in the test period (which is the year relevant deduction was
incurred, each intervening income year and income year, per s267-20).

Sec 269-95(1) Group gains control when:


 the group has power to obtain, or is capable under a scheme of
obtaining, the beneficial enjoyment of the income or capital of the
trust (eg. by ensuring the exercise of the trustee discretion in their
favour)
 group is able to control directly or indirectly, or is capable under a
scheme of obtaining control of, the application of the income or
capital of the trust.
 Trustee is accustomed, is under an obligation or might reasonably be
expected to act, in accordance with the directions or wishes of the
group;
 Group able to remove or appoint T or any of the T’s; or
 Group gains fixed entitlements to more than 50% of the income or
capital of the trust.
Sec 269-95(2) & (3) Control of trust taken not to have changed where a member of the
controlling group dies, becomes incapacitated or suffered a marriage
breakdown. (sbj to certain conditions)

Sec 270-10 Income injection test:


Applies where:

121
 Trust has a deduction (incl. prior year losses) in the income year;
 There is a scheme under which:
 Trust derives assessable income in income year;
 Person not connected with the trust (outsider) provides a
benefit directly or indirectly to the trustee or B (or their
associates);
 It is reasonable to conclude that any one or more of the
following is the case:
a) Scheme income has been derived wholly or partly, but not
merely incidentally because the deduction is allowable
b) Benefit has been provided to T or B wholly or partly, but
not merely incidentally because deduction is allowable
c) Benefit has been provided by T or B wholly or partly but
not merely incidentally because deduction is allowable.

Consequence:
 If Net Income < Scheme assessable income, Net income increased to
equal scheme income. If deduction relates exclusively or may
appropriately be related to the scheme assessable income, it is not
allowable to the trust. ALSO, no deduction is allowable against the
scheme assessable income.

Implications of Family Trusts:


[Family trusts do not need to satisfy the tests, except for income injection
test]

Sec 272-75 What is a family trust?


Where T has made an election (family trust election) that the trust be a
family trust and the election is in effect.

Sec 272-87(1) CANNOT make a family trust election unless it satisfies the family
control test at the end of the income year. That is:
a) individual specified in election (test individual) and one or more
members of his/her family (ie. spouse, child, grandparent, parent,
niece, nephew and spouse’s relatives, per s272-95); OR
b) any of persons above and a professional or legal adviser to the family
(does not apply if test individual and/or one or more members of the
family have more than a 50% stake in the income or capital of the
trust); OR
c) trustee of one or more family trusts, or such T and any persons above
(if controlling group has more than 50% stake in income or capital of
the trust).

Sec 272-87(2) Group is taken to have control of the trust if:


 the group is able to obtain directly or indirectly the beneficial
enjoyment of the income or capital of the trust (eg. by ensuring the
exercise of the trustee discretion in their favour)
 group is able to control directly or indirectly, or is capable under a
scheme of obtaining control of, the application of the income or

122
capital of the trust.
 Trustee is accustomed, is under an obligation or might reasonably be
expected to act, in accordance with the directions or wishes of the
group;
 Group able to remove or appoint T or any of the T’s; or
 Group gains fixed entitlements to more than 50% of the income or
capital of the trust.

Sec 272-87(3) Interposed Entities:


A company or ptsp in respect of which an interposed entity election is
proposed to be made passes the family control test if a group consisting
of:
a) the individual who is specified in the family trust election above in
relation to the interposed entity election
b) one or more members of the individual’s family; or
c) T’s of one or more family trusts, provided individual is specified in
the family trust election of each of those family trusts; or
d) Any persons covered by any combination of the above;
Have, between them, directly or indirectly, and for their own benefit,
fixed entitlements to a greater than 50% of the share of income or capital
of the coy or ptsp.

Div. 271 Family Trust Distribution Tax:


Special tax payable where:
 T of family trust has made family trust election; or partners in ptsp, a
company or trustee of a trust have made an interposed entity election
to be included in a family group in relation to a family trust; and
 The trust, ptsp or coy makes a distribution of, or confers present
entitlement to, income or capital to a person other than the test
individual or member of his/her family group.
Tax is 48.5% of the amount of distribution.

Net Income v. Accounting Income


Where Net Income for tax purposes > Accounting income (amount that
can be distributed):
Two views on how to treat:
a) Proportionate view – B is taxed under s97 or T under s98 if B under
legal disability
b) Quantum view – No B is presently entitled to that income in excess of
amount distributed to B’s and therefore cannot be assessed. T taxed
under s99 or 99A.

Where Net Income < Accounting Income:


Taxable income assessed, any excess accounting income distributed not
liable to taxation.

Taxation of Trust Income


Refer to pg 11-6

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Beneficiary Presently Entitled and No Legal Disability
Sec 97(1) Beneficiary shall be assessable on share of income:
 That is attributable to a period when B was resident, whatever the
source; and
 Share of net income that is attributable to Australian sources during
the period when B was not a resident.

B assessed at marginal rates.

Sec 98 If Beneficiary is non-resident:


Income is taxed first to Trustee under s98(3), (4) and then to B with a
credit being for tax already paid by T.

B deemed presently entitled:


If deemed presently entitled under s95A(2), T will be taxed under s98.

But if B is a company or beneficiary in his capacity as a T of another trust,


then assessable under s97.

Beneficiary presently entitled BUT under legal disability


Sec 98 Where presently entitled B is under a legal disability, T will be liable to
pay the tax on B’s share of the income – Based on rates applicable to
the Beneficiary.

If B receives other income, trust income is added to other assessable


income. A credit for the tax paid by trustee is allowed under s100 BUT
credit cannot exceed tax payable.

Where no Beneficiary presently entitled


Sec 99A All income to which no B is presently entitled falls firstly under s99A and
is taxed at the highest rate of personal tax, ie. at flat rate of 47% in
hands of Trustee.
[NOTE: foreign sourced income is only taxable if trust is a resident]

Commissioner’s discretion:
Commissioner has a discretion to assess under s99 if he is of the opinion
that it is unreasonable to assess under s99A.

Sec 99 Net income, EXCEPT net income of an estate of a person who died <3yrs
before end of income year (in this case, income taxed at general individual
rates) is taxed at progressive rates:
 If non-resident trust estate – use rates on pg 12-26 for ‘prescribed NR
beneficiaries’
 If resident trust estate – use rates on pg 12-27.

Categories of income the Commissioner will allow under s99:


Refer pg 12-27

124
Deceased Estates
Sec 101A Income received after death:
T is assessed on income received in a deceased’s estate if the deceased
would have been assessed on it.

This income, together with other amounts to which no B is presently


entitled, is assessed under s99A, unless Commissioner exercises his
discretion to assess it under s99.

Receipt of trust income NOT previously subject to tax


Sec 99B A B, resident at any time during the income year, is assessable on
amounts paid to him or applied for his benefit which has not
previously been subject to Australian tax.

Distributions out of corpus


Tindal v. FCT; Bradies Where distributions are out of corpus of a trust to make up a deficiency of
Trustees v. IR income or are an advance on income, they are assessable in hands of
Commissioners recipiend.

125
COMPANIES
What is a Company?
Public Company
Sec 103A(2) A public company is one that:
 Has its non-preference shares listed on a stock exchange on the last
day of the income year, and at:
 No time in the year of income did 20 or fewer people share
75% or more of the company’s capital, voting or dividend rights
(s103A(3))
 Nor were the voting or dividend rights capable of being
varied to produce such a result (sec 103A(6))
 Was a cooperative company; or
 Has at all times since date of incorporation been a non-profit company
and prohibited from making a distribution to its members or their
relatives; or
 Is a mutual life assurance company; or
 Is a friendly society dispensary; or
 Is a subsidiary of a public company; or
 Is a statutory body or a company in which a government body has a
controlling interest in as at the last day of the income year; or
 Is a registered society, trade union or employer association; or
 Is a limited partnership.
Sec 995-1
A private company is one which is not a public company.

Company Bad Debts


Sec 8-1 or s25-35 Company can claim deduction for bad debt under either sections (s25-35
are for debts written off) (Refer to above – Deductions/Specific
Deductions).

Subdiv. 165-C, 166-C and To be allowed deductions, company must:


175-C  Write off the debt in the year of the claim AND:
 A more than 50% continuity of ownership test with regard
to the ownership test period (ie. deduction year, debt year and all
intervening years) is satisfied per s165-123; OR
 A continuity of business test per s165-126 is satisfied.
Sec 165-120(2)  For debt incurred and written off in same year, the continuity of
ownership test must be satisfied in whole of income year
Sec 165-120(3) A company cannot claim a deduction for a debt incurred and written off as
bad on the final day of the income year.

Tax Losses [also pg 65]


Refer to pg. 12-16

126
Implications for Shareholders of Dividends
Refund of excess imputation credits:
Sec 567-25 Where you have credits left after offsetting your tax payable, you are
entitled to receive a refund

For INDIVIDUALS:
Sec 44(1) (inclusion in Y); Shareholder includes grossed up amount of dividend in assessable
s160AQT (for gross up) income.
Grossed up amount = Dividend x 64/36

Sec 160AQT(1AB) Imputation credit = Franked amount of dividend x 36/64

Sec 160AQU A tax rebate generally equal to the amount of the imputation credit is
allowed to the shareholder.

For Non-Resident Individuals:


Sec 128B(3)(ga) Where they are paid the franked dividends, it is the final tax imposed on
the dividend so they do not pay any WHT on the dividends.
Sec 128D(1) Where they are paid unfranked dividends, the WHT is the final tax. The
unfranked portion is not included in assessable income. NO rebate
available for franked portion.

For Corporate Shareholders:


Sec 44 A company includes the dividend assessable in its income.
Sec 160AQT Dividend not required to be grossed up.
Sec 46 Inter-corporate dividend may be available
Sec 160APP Franked amount of dividend credited to company’s franking account.

Where company receives dividend through trust:


Sec 95  The gross up amount under s160AQT is included in assessable income
of the trust and therefore in net income of trust.
Sec 97  Company is to include in its assessable income its share of the net
income. [coy will need to include gross up amt in income]
Sec 160APQ  Franking credit will arise on franked part of dividend
Sec 45Z  Company treated as direct s/holder and inter-corporate dividend rebate
may be available for the dividend.

Where company receives dividend through partnership:


Sec 92  The gross up amount under s160AQT is included in assessable income
of the ptsp and therefore in net income of ptsp.
 Company is to include in its assessable income its share of the net
income. [coy will need to include gross up amt in income]
Sec 160APQ
Sec 46  Franking credit will arise on franked part of dividend
 Company treated as direct s/holder and inter-corporate dividend rebate
may be available for the dividend.
Sec 160AR
The company is entitled to an allowable deduction equal to so much of the
potential rebate amount or class C potential rebate amount in relation to
the trust amount as does not exceed the trust amount included in

127
assessable income. [Refer pg 13-28]
PR amount = Grossed up amount for dividend (ie. dividend x 36/64)

For Trust Shareholders:


Sec 160AQT Trustee is to include dividend gross up amount as assessable income.

Sec 160AQW(1) Sec 160AQT amount shall be included in any relevant trust amounts in
same proportions as persons are liable to be assessed or would but for
s128D be assessed in respect of the franked dividend (ie. apportion
dividend and gross up amount between beneficiaries – beneficiaries also
claim their portion of the rebate).

Sec 160AQY Trustee who is liable to be assessed under s98 or 99 or 99A can claim the
relevant potential rebate amount in that assessment.

Sec 160AQV to s160ARD Where franked dividends are received indirectly through trusts, they are
treated as if they had been received directly.

For Partnership Shareholders:


Sec 160AQT Partnership is to include dividend gross up amount as assessable income.

Sec 160AQW(1) Sec 160AQT amount shall be included in any relevant partnership
amounts in same proportions as persons are liable to be assessed or would
but for s128D be assessed in respect of the franked dividend (ie. apportion
dividend and gross up amount between partners – partners also claim their
portion of the rebate).

Sec 160AQZ Franking rebates of partners will be equal to the potential rebate amount
in that partnership amount.

Sec 160AQV to s160ARD Where franked dividends are received indirectly through partnerships,
they are treated as if they had been received directly.

Franking Account
Franking account entries: Refer pg 12-70

Carry forward of franking surplus:


Sec 160APL The surplus in the franking account at the end of the year is available to be
carried forward to the following year.
[REMEMBER: to covert the credit to tax paid basis for 2003 year

Estimated debit determination:


Sec 160AQD A company can lodge an application with the Commissioner for a
determination of the estimated franking debit which is expected to arise if
it expects to have its future tax liability reduced (hence have its franking
account adjusted accordingly).

Penalty Taxes
Franking Deficit Tax:
Sec 160AQJ FDT will arise where there is a debit balance in the franking account at

128
the end of the year, ie. franking deficit.

Sec 160AQJ(1B) FDT = Class C franking deficit x 36/64

Sec 160ARU This tax is due and payable on the last day of the month following the end
of the relevant year.

Where FDT is paid, it may be offset against company tax subsequently


assessed provided company was ‘sufficiently resident’ in the relevant
year.
Sec 160AQK The offset is calculated as the lesser of:
 Amount of franking deficit tax that has not otherwise been applied
 The amount of company tax reduced by FTC applicable to the income
year.
[NOTE: payment of FDT does not give rise to a franking credit]

Franking additional tax:


Sec 160ARX FAT penalty applies where:
 The class C franking deficit of a company at the end of the year is
more than 10% of the total of the class C franking credits during the
year; AND
 The class C franked amount of a dividend paid during the franking
year to s/holders in the company exceeded the class C required
franking amount (see below) for that dividend.

FAT = FDT x 30%

Sec 160ASB; IT 2560 The commissioner has discretion to reduce amount of penalty.

Deficit Deferral Tax:


DDT arises where company pays instalment/s during the year and during
the next franking year, a company receives a refund on the instalments
because:
 Commissioner waives or reduces the instalment – s221AZL;
 Company lodges a downward estimate after paying an instalment
which results in the instalment being refundable – s221AZQ.
The company here needs to have a Class C franking deficit or increased
franking deficit IF the refund were to be payable in the year in which
instalment was paid.

Sec 160AQJC DDT = Deficit deferral amount x 36/64


Deficit deferral amount = the amount of deficit or deficit increase which
would have arisen if the refund had been received or credited in the same
franking year as the payment.

Sec 160ARUA DDT due and payable 14 days after relevant refund is received.

Franking Deficit Deferral Additional Tax:


Arises when Class C deficit deferral amount arising under s160AQJC (ie.

129
calc. of DDT) exceeds 10% of the following:
Total class C franking credits in first year – (s160AQJC refund x 64/36)

Sec 160ARYC DDAT = DDT x 30%

Required franking amount:


Sec 160AQF When a company pays a frankable dividend to a resident shareholder, it
must frank the dividend to the RFA.

Sec 160AQE Is the minimum amount a dividend is required to be franked in order to


avoid being regarded as under-franked. Therefore:
 If franking surplus > Dividend – whole of dividend must be franked
 If franking surplus < Dividend – dividend partly franked to extent of
surpluses
 If no surplus, no need to frank.

Sec 160AQE RFA = Dividend amount x (Franking surplus/Total dividends +


Committed future dividends + same day dividends + Linked Dividends +
Substituted Dividends)

Sec 160AQDB RFA is ascertained from the franking account balances at time of payment
of dividend.

Sec 160APX(1B) Underfranking if:


 Class C RFA > 10% of amount of dividend; and
 The RFA > franked amount of dividend
Automatic class C franking debit will arise in the franking account equal
to underfranked amount.
Sec 160ARX(3) Overfranking if:
 Class C franking deficit at end of year > 10% of total of Class C
franking credits arising during the year; and
 Class C franked amount of dividend paid during franking year > RFA
Liable to pay FAT (see above)

Franking Account returns and assessment


Companies are required to lodge franking account returns if they have
franking deficit tax liability.

Sec 160ARH An assessment of the company’s franking account balance which is


deemed to have been made by the Commissioner and served on the
company at time the return was lodged.

130
Deemed Dividends
Distributions by a liquidator
Sec 47(1) Distributions to s/holders by a liquidator in the course of winding up the
company, to the extent to which they represent income derived by the
company other than income which has been properly applied to
replace a loss of PUC, shall be deemed to be dividends paid to
s/holders out of profits derived by it.

Sec 47(1A) The term ‘income’ has been extended to include:


 Any amount that is assessable income of the company under any
provision of the ITAA other than the CGT provisions; and
 Any capital gain arising under the CGT provisions, but calculated w/o
regard to indexation – ignore capital losses.

ALSO refer pg 13-30 for summary of assessability of types of distribution

Loans and Payments by Private companies


PLS 12-71

Remuneration and Termination Payments


Sec 109 If a private company pays or credits to an associated person an amount
that is, or purports to be:
 Remuneration for services rendered by the associated person; or
 An allowance, gratuity or compensation in consequence of the
retirement of the associated person from an office or employment held
by the associated person in the company, or upon the termination of
such office or employment;
So much of the excessive amount as exceeds an amount that, in the
opinion of the commissioner, is reasonable:
 Is not an allowable deduction; and
 Shall be deemed to be a dividend paid by the company.

Off Market share buy-backs


Sec 159GZZZP(1) Where a company makes an off-market buy-back, the amount that is taken
to be a dividend paid by the company is the difference between:
 The purchase price; and
 Part of the purchase price in respect of the buy-back of the share
which is debited against amounts standing to the credit of the share
capital account of the company;
Where a company makes an off-market share buy-back, the dividend is
taken to have been paid:
 To seller as a s/holder in the company; and
 Out of profits derived by the company.

The amount taken to be dividend is included in the assessable income of


the s/holder under s44(1).

131
CGT Consequence:
The full buy-back is treated as consideration for the sale of the shares.
However, purchase price is reduced by the reduction amount.

Sec 159GZZZQ(4) Reduction amount is worked out as:


a) that part of the buy-back price that is taken to be a dividend; and
b) of those amount, only amounts that are:
 included in the seller’s assessable income; or
 are eligible non-capital amounts – as this amount is not
paid out of share capital or ARR, are reduction amounts.

132
FOREIGN INCOME, DEDUCTIONS AND CREDITS
Foreign Income
Sec 6AB Defines ‘foreign income’ – refer pg 16-4

Sec 160AE(2) Capital gains:


Profits or gains of a capital nature derived from a foreign source are
included in a resident’s income, and in respect of which foreign tax is
payable, are deemed to be income having a source in the foreign country.
This means that taxpayer would qualify for tax credit.

Foreign Income exemptions:


Sec 23(r)  income derived by NR from NR sources;
Sec 23AF  exemption for income earned by Australian residents working
overseas on approved aid projects
Sec 23AG  foreign salary or wages income earned during a period of at least 91
days continuous service that is subject to tax in the source country
Sec 23AH  exemption for foreign branch profits of Australian companies
Sec 23AI/23AK  exemption for amounts paid out of attributed income; and
Sec 23AJ
 exemption for certain non-portfolio dividends from foreign countries.

Classes of foreign income:


Sec 160AF(7) For purposes of determining availability of FTC, foreign income is split
into 4 classes.

Sec 160AF(8) When you are determining foreign losses and deductions against foreign
income, foreign income is also divided into 4 classes.

Sec 160AF(7) 4 classes of foreign source income for which FTC is available:
Sec 160AEA  passive income (eg. dividends, interest, royalties, annuities, rents, etc)
Sec 160AE(4)  offshore banking income
Sec 27CAA  lump sum payments from eligible NR non-complying super funds
which are assessable
 other income.
Sec 160AFD(8) There are 4 classes of foreign source income which are quarantined to
determine net foreign income:
 interest income
 modified passive income – ie. passive income w/o interest income
 offshore banking income
 other income.

133
Sec 79D Foreign deductions to offset foreign income:
Foreign deductions must be offset against assessable foreign income of a
particular class and cannot be offset against Australian sourced
income.

Unapplied foreign income deductions/loss is quarantined and is available


to be carried forward to a subsequent year to be offset against future
foreign income of the same class.
Sec 79DA
Election:
An election can be made to offset the domestic loss against the foreign
income.
BUT don’t do this because you need to maximise foreign tax credits and
domestic losses can then be carried forward.

Foreign Losses
Sec 79D Foreign deductions to offset foreign income:
Foreign deductions must be offset against assessable foreign income of a
particular class and cannot be offset against Australian sourced
income.

Unapplied foreign income deductions/loss is quarantined and is available


to be carried forward to a subsequent year to be offset against future
foreign income of the same class.
Sec 79DA
Election:
An election can be made to offset the domestic loss against the foreign
income.
BUT don’t do this because you need to maximise foreign tax credits and
domestic losses can then be carried forward.

Sec 160AFD Foreign losses may offset ONLY against assessable foreign income.

Sec 79D Foreign loss incurred in one year cannot be deducted from DOMESTIC
assessable income of same year, nor can it be carried forward and offset
against domestic assessable income of subsequent years.

Foreign Tax Credits


Sec 160AF Where:
 assessable income of a resident taxpayer includes foreign income; and
 taxpayer has paid foreign tax in respect of the foreign income and was
personally liable for it;
the taxpayer is entitled to a credit of:
 amount of foreign tax, reduced in accordance with any relief available
to taxpayer under the law relating to the tax; OR
 amount of Australian tax payable in respect of the foreign income,
WHICHEVER IS LESS.

134
Sec 160AF Foreign tax is calculated as:
 any ‘direct’ credit for foreign tax paid on foreign income (eg. WHT);
plus
 any indirect credit for underlying tax – eg. company that receives
foreign dividends from a related company taken to have paid company
tax on the dividends.

Credit for underlying foreign tax:


Sec 160AFC(2) Dividends received by Australian companies from related foreign
companies are grossed up in respect of the underlying tax. The company
then gets a credit for the tax gross up and any WHT paid.

Formula to calculate credit: refer pg 16-10

Australian tax payable:


Formula on pg 16-13

Excess FTC:
Sec 160AFE(1) Australian taxpayers can carry forward, for up to 5 years, any excess
FTC for application against tax payable on foreign income of the same
class.

Sec 160AFE(1D) Companies are entitled to transfer excess FTC to another company in the
same company group provided:
 income company has, in the current year, derived income of the same
class to which the transferable excess credit relates;
 income company is a group company (ie. 100% ownership) in relation
to the credit company in the current year; and
 both companies agree in writing before lodgement of income
company’s ITR.

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FRINGE BENEFITS TAX (All Sections in FBTAA)
FBT liability calculation
Sec 136AA Fringe benefits taxable amount = Aggregate fringe benefit amount x
1.9417 (ONLY from 1/4/96)

Aggregate FB amount = value of benefits provided – value of exempt


benefits – value of benefit exclusions – recipient’s contribution.

Sec 5C(2); TR 2000/D8 From 2000/01 FBT year:


Need to calculate FB taxable amount by classifying fringe benefits into
two types:
 Employers type 1 aggregate FB amount – where a GST input tax
credit is available to the provider
 Employer’s type 2 aggregate fringe benefits amount – where a GST
input tax credit is not available to the provider.

Sec 5C(3) Type 1 Aggregate fringe benefits amount:


1) Identify the FB for each employee that are GST-creditable benefits
and work out for each employee their ‘individual fringe benefits
amount for the year
2) Add up all individual fringe benefits amount
3) Identify the excluded fringe benefits for the year for each employee
that are GST creditable benefits and add up their taxable values
4) Add up total of 2 and 3.

GST-creditable benefits:
Sec 149A A benefit is a GST creditable benefit if either of the following is, or was
entitled to an ITC because of the provision of the benefit:
 Person who provided the benefit;
 Person who is or was member of the same GST group as the person
who provided the benefit.

Sec 5E(2) Individual fringe benefits amount:


The sum of the employee's share of the taxable value of each fringe
benefit that relates to the year of tax and is provided in respect of the
employment other than an excluded fringe benefit.

Sec 5E(3) What is an excluded fringe benefit?


A fringe benefit:
a) provision of meal entertainment; or
b) car parking fringe benefit; or
c) entertainment facility leasing expenses; or
d) various remote area benefits; or
e) whose taxable value is reduced under section 60 (about remote area
housing); or
f) that is an amortised fringe benefit (see subsection 136(1)); or

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Type 1 aggregate fringe benefit amount is multiplied by factor of 2.1292

Type 2 aggregate fringe benefit amount:


One where provider not entitled to a GST ITC.
Eg. food, health insurance, overseas travel, education (GST free items);
mortgage payments, residential rents (input taxed items).
Applies to situations where:
 FB provided by taxable value determined before intro of GST
 FB are GST free
 Goods or services are not acquired by employer (eg. manufactured)
 Small business employers who opted not to register for GST
 Activities of certain registered employers are input taxed.
Sec 5C(4) For all fringe benefits amount which is not GST creditable benefits:
1) Identify the FB for each employee that are not GST-creditable benefits
and work out for each employee their ‘individual fringe benefits
amount for the year
2) Add up all individual fringe benefits amount
3) Identify the excluded fringe benefits for the year for each employee
that are not GST creditable benefits and add up their taxable values
4) Add up total of 2 and 3.

Type 2 aggregate fringe benefit amount is multiplied by factor of 1.9417

Aggregate non-exempt amount:


Sec 5B(1E) For employers who provide exempt benefits under s57A (ie. government
body, public hospital)
Refer pg 19-9 for calculation method

Fringe Benefits Taxable Amount =


(Type 1 aggregate fringe benefits x 2.1292)
+ (Type 2 aggregate fringe benefits x 1.9417)
+ Aggregate non-exempt amount

Fringe benefits tax payable = Fringe benefits taxable amount x 48.5%

Rebatable Employers
Sec 65J(1) Refer to p 19-12 for list of rebatable employers (those who cannot claim
deduction for FBT paid, eg. religious institutions, non-profit org)

What is a Fringe Benefit?


Sec 136 Need to satisfy certain conditions outlined pg 19-17 (eg. must be a
benefit, provided in the year, provided to employee, etc)

Exclusions:
Sec 136(1)(f) Salary and wages (per PAYE definition) are excluded from being fringe
benefits.

Sec 136(1)(g) to (q) Other exclusions – refer pg 19-19

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Is there a benefit?
Sec 136(1) Benefit is defined – refer pg 19-20

Benefit provided in respect of employment of employee:


Sec 148 Deems benefit to be provided in respect of employment, irrespective of
whether:
 Benefit provided relates to other matter or thing
 Employment is past, present or future
 Benefit is surplus to needs of employee
 Benefit also provided to another person
 Benefit offset by any inconvenience or disadvantage
 Benefit required to be sued in employee’s employment
 Benefit provided is in nature of income
 Benefit provided as reward for services rendered or to be rendered.

Car Fringe Benefit


Sec 7(1) A car fringe benefit is provided if, on any day, a car is held by an
employer, an associate of the employer, or person under an
arrangement with the employer or associate:
 Is applied to private use by an employee or associate of the employee;
 Is taken to be available for private use of the employee or associate.

Is there a ‘car’?
Sec 136(1) Car is a MV, including a 4WD, that is:
 A motor car, station wagon, panel van, utility truck or similar vehicle
designed to carry a load of less than 1 tonne; or
 Any other road vehicle designed to carry a load of less than 1 tonne or
fewer than 9 passengers;
BUT does not include a motor cycle or similar.

Car held by employer:


Sec 162(1) Holding of a car exists where car is owned by employer or otherwise
available to it.

Private use of car:


Sec 136(1) Private use is any use of the MV by employee or associate, that is not
exclusively in course of producing assessable income of the employee.

MT 2027 Private use includes home to work travel BUT there are some exceptions
(eg. employment duties of itinerant nature, home is a place of work, etc)

Available for private use:


Car is available for private use where:
Sec 7(2)  Car is garaged at or near employee’s residence or of an associate of
employee;
Sec 7(3)  Car is not at employer’s, associate’s or arranger’s business premises
and any of the following conditions are satisfied:
 Employee entitled to apply car to private use

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 Employee not performing duties of employment and has
custody or control of the car;
 An associate of employee is entitled to use, or has custody
or control of, the car.
MT 2027
Prohibition by employer of use of the car which is not consistently
enforced will mean car is available for private use.

Exempt car benefits:


Sec 8(2)  Certain commercial cars – ie. taxi, panel vans or utilities or any other
vehicle designed to carry load <1tonne provided vehicle not
principally designed to carry passengers. PROVIDED only private
travel is ‘work-related’ (ie. home to work travel) and non-work related
travel is minor, infrequent or irregular.
Sec 8(3)  Unregistered cars principally used in connection with employer’s
business.

Taxable value of car fringe benefits:


Calculated by:
Sec 9  Statutory formula method – refer pg 19-28
Sec 10  Operating cost method – refer pg 19-31

Debt Waiver Benefit


Sec 14 Debt waiver benefit arises where an employer releases an employee from
a debt.

Taxable value of debt waiver benefit:


Sec 15 Is the amount waived.

Loan Benefits
Sec 16(1) Where an employer makes a loan to the employee

Taxable value of loan fringe benefit:


Amount by which notional interest rate > actual interest accrued on loan

What is a Loan benefit?


Sec 136(1) A loan consists of:
 Advance of money;
 Provision of credit
 Payment made on behalf of employee where there is an obligation to
repay employer
 Any other transaction that is a loan in substance
Sec 16(2)  Debt of employee which is past due for payment
Sec 16(3)-16(4)
 Deferred interest where interest accrues on loan yet is not payable at
least every 6 months. The deferred interest component gives rise to a
new loan.

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Exemptions:
Sec 17(1)-17(2)  Arm’s length loan made by employer in business of lending
Sec 17(3)  Various advances to meet employment related expenses (conditions:
Sec 17(4) expenses will be incurred within 6 months of making loan, amount of
loan does not substantially exceed the level of expected expenses and
employee required to a/c to employer within 6 months of expenses
met and repay unused amount)
 Advances repayable within 12 months if for temporary
accommodation where various conditions are met (eg. sole purpose of
loan is to enable employee to pay security deposit on
accommodation).

Taxable value of loan benefits:


Refer pg 19-37

Otherwise deductible rule:


Sec 19 Where recipient is an employee the taxable value may be reduced where
employee uses all or part of the loan for income-producing purposes.
Conditions:
 Loan provided to employee [Rule DOES NOT apply if loan made to
TD 93/90 an associate of the employee].
 Employee would have been entitled to a ONCE ONLY deduction in
respect of interest on the loan, had the employee been required to pay
interest;
 Employee to provide to employer with declaration – ie. indicating log
book and odometer records have been kept.

[refer pg 19-38 for calculation]

Expense Payment Benefit


Expense payment benefit arises when:
Sec 20(a)  Employer pays expenses incurred by an employee
Sec 20(b)  Employer reimburses expenses incurred by an employee

IT 2614; TR 92/15 Reimbursement v. Allowances:


Reimbursement assumes that an employee is to be compensated exactly
for an expense already incurred although not necessarily disbursed.
Allowance is where an employer pays an employee an estimated future
expenditure – EXCEPT advance payment may still be reimbursement if
employee required to substantiate expense and excess returned to
employer.

Exemptions:
Sec 20A  Non-private use declaration
Sec 21  Accommodation expenses
Sec 22  Car expenses reimbursed on cents per kilometre basis.

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Taxable value of expense payment benefit:
Refer pg 19-41

Housing Benefit
Sec 25 Where an employer grants an employee a housing right, for more than 1
day, as a usual place of residence.

Sec 136(1) Housing right is a lease or licence granted to a person to occupy or use a
unit of accommodation where it represents the person’s usual place of
residence.

Sec 58 Exemption:
Employees of government, religious institutions, or non-profit bodies who
provide live in care for the elderly, mentally or physically handicapped, or
those in necessitous circumstances.

Sec 58ZC Remote area housing benefits exempted from FBT from 1/4/00.

Taxable value of housing rights


Refer pg 19-44

Living Away From Home Allowance Benefit


Sec 30 Arises when the employer pays an employee an allowance for additional
expenses for disadvantages suffered due to living away from his/her
usual place of residence for employment purposes.

Taxable value of LAFHA:


Refer pg 19-48

Car Parking Benefit


Sec 39A Car parking exists when:
 It is in relation to a daylong period ie. between 7am and 7pm
 A car must be parked on business premises or associated premises
which are within 1km of a commercial parking station;
 There must be a commercial parking station located within 1km of
employer-provided carpark and the lowest fee charged by the operator
for such commercial parking station in the ordinary course of business
to members of the public for all-day parking on the first business day
of the FBT year is more than the car parking threshold.

Expense payment:
Where the employee leases the car space and is then reimbursed by the
employer, the car space would not be associated premises of the employer
and an expense benefit will instead arise under s20.
BUT may be exempt under s58G

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Exemptions:
Sec 58G(1)  Residual benefits and certain expense payment benefits
Sec 58G(2)  Benefits provided by certain non-profit bodies and public educational
institutions
Sec 58G(3)  Benefits provided by govt. public educational institutions
 Minor benefits
 Benefits exempted by regulations, eg. disabled persons.
Sec 58GA(1) For small business employers, a car parking benefit provided in respect of
the employement is an exempt benefit if:
 Car is not parked at commercial parking station; and
 Employer of employee is not a public company or a subsidiary of a
public company, in relation to the day on which the benefit is
provided; and
 The employer is not a government body; and
 The sum of the employer’s ordinary income and statutory income for
the year of income ending most recently before start of the FBT year
is <$10m.
NOT EXEMPT if employee’s car is parked at a commercial parking
station.

Taxable value of car parking benefits:


Sec 39C  Commercial parking station method
Sec 39D  Market value method
Sec 39DA  Average cost method
For EACH car parking benefit provided, then to calculate the total taxable
value:
Sec 39FA  Statutory formula
Sec 39GA  12 week record keeping method

Refer pg 19-53

Property Benefits
Sec 40 Arise where employer provides property of any type (eg. goods, real
property, shares and other securities or rights) to the employee.
(can be either in-house or external property benefits)

Exemption:
Sec 62 A general exemption of $500 of the taxable value of in-house property
benefits exists for each recipient employee for each year.

Taxable value of property benefit:


Refer pg 19-59

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Residual Benefits
Sec 45 Arise on provision of benefits by employer to employee that meet the
criteria of fringe benefits but are not otherwise specified.

Exemptions:
Refer pg 19-62

Taxable value of residual fringe benefit:


Refer pg 19-63

Entertainment
Sec 37AD Meal entertainment benefit consists of:
a) entertainment by way of food and drink;
b) travel or accommodation connected with (a); or
c) reimbursement or payment of expenses incurred in providing (a) or
(b).

NOTE:
Sec 37AD It is still meal entertainment:
 if business discussions or business transactions occur;
 if in connection with the working of overtime or otherwise in
connection with the performance of the duties of any office or
employment;
 for the purpose of promotion or advertising; or
 at or in connection with a seminar.
TR 97/1 Tests for determining whether the provision of food and drink amounts to
meal entertainment are:
1. Why is the food and drink being provided?
2. What food and drink are being provided? If it is a function held at a
restaurant, it will be considered to be entertainment. As per IT 2675,
food and drink consumed off employer premises at a social function
constitutes meal entertainment.
3. When is it provided? The benefit was provided outside work hours, or
during work hours.
4. Where is it provided? At a restaurant off business premises, more
likely to be considered entertainment.

Taxable value of entertainment benefit:


Sec 37B  50/50 split method
Sec 37C  12 week register method
[Refer pg. 19-65]

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Other Benefits
Sec 32 Airport Transport Benefits – pg 19-66
Sec 35 Board Fringe Benefits – pg 19-66

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