Capital Gains and Others

8/3/2019 Capital Gains and Others

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CAPITAL GAINS


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Continued from Myer emporiumcaseWhat is capital

Fruit & Tree


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The Fruit And Tree Concept

Turnover

Fixed


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Fixed capital is what an owner turns toprofit by keeping it in his possession(eg. fixed asset) while circulating

capital is what he makes profit byparting with and letting it changemasters (eg. stock-in-trade)

Reference:John Smith & Son vMoore(12TC266)(HL)p282


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Cancellation of business contracts

These are generally construed ascompensation for loss of business

profits and so assume the character ofincome.

However caution must be exercised.


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Heavy metals Pty Ltd (HMP) vFCT Companys business was mining/selling

rutile( a mineral composed primarily oftitanium dioxide)

The products were sold through

established contracts. When clients did not need any further

supply, they terminated the contract andgave a compensation in consideration

The company then ceased miningQ Is the compensation capital or

revenue(income)


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Held

MINE

Machinery

TREE

FRUIT

rutile

Compensation was for Nottaking Fruit. Nothing to do withmine or machinery. They wereintact and company couldcontinue mining


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Glenboing Union Fireclay Co. ltd v IRC(1921)

The Company was lessee of fireclay

fields. It worked these fields to earn its income.

A railway company took out a statutory

order preventing the lessee from workingon some part of the land.

A compensation was paid as aconsideration.

The amount of the compensation paidwas computed based on damages forloss of profits

Q: Is the compensation Capital or revenue(income)


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Held

Fireclay field

bricks

tree fruit

Not able to work a part ofthe land was the loss of acapital asset


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STATUTORY INCOME

Income which is NOT ordinary incomeBUT is specifically included asassessable income.

Examples: Non cash business benefits

Trading stock

Net capital gains


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Exempt Income

Division 11

3 main categories:

SS11-5

Entities exempt from tax regardless ofthe nature of income they receive egpublic educational entities listed under

charity, education, religion or science


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Exempt Income

Ss11-10

Income that is exempt regardless ofthe income tax status of the entity

receiving it. Ss 11-15

Exempt income if derived by certain

entities.


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Non assessable Non exemptincome Sect 6-23

Ensures that not all income are taxable

Eg it excludes winnings and gifts.

Sect 11-55

Excludes the GST portion of sales.


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DERIVATION OF INCOME

To be taxable, income must be derived derive is relatively defined in s995-

1(1)

Some cases:FCT v Clarke(1927) 40 CLR246-

Derived only means obtained, gotor acquired

FCT v Thorogood (1927)40 CLR454-Derived is not necessarily actuallyreceived but ordinarily that is the

mode of derivation.


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Why is derivation important

Income tax is payable on a taxpayerstaxable income for an income year

To determine in which income yearordinary income and general deductionsare brought to account, it is necessary toexamine the terms:

derived (which appears in s 6-5 ITAA97)

incurred (which appears in s 8-1 ITAA97)


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When is income derived? When income is derived is determined by

the application of ordinary business andcommercial principles

Methods of accounting for income:

The cash basis (when cash or equivalent isreceived): Employment income (eg salary and wages)

Income of sole traders (Firstenberg, Dunn)

The accruals basis (when income is earned i.e.when there is an enforceable debt): Income from professional partnerships (Henderson)

Income from trading business (J Rowe & Son)


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Which method of accounting?

The method to be adopted by a taxpayeris that which is calculated to give asubstantially correct reflex of thetaxpayers true income (Cardens case)

The method to be used is the one thatmost accurately represents the truth and

reality of the situation (Ballarat Brewing

Co)


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When is a loss or outgoingdeductible?

Whether a loss or outgoing has beenincurred depends on the existence of aliability rather than whether or not it hasbeen discharged

For a loss or outgoing to have beenincurred: The taxpayer must have completely subjected

itself to the loss or outgoing (James Flood)

A presently existing liability must exist (NilsenDevelopment Laboratories)

There must be more that a mere impending,threatened, or expected liability (New Zealand

Flax Investments)


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Particular Receipts

Conditional ContractsIncome is not earned until the

contracts become unconditionalPre payments or receipt beforeearningGenerally not income earnedCase: Arthur Murray(NSW)Pty Ltd vFCT(1965)114CLR 314


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Case: Arthur Murray(NSW)PtyLtd v FCT(1965)114CLR 314

The Company ran a dance schoolThe courses ranged from basic ones

of 5 hours to 30 hours through tolifetime courses of 1,200 hours

costing 3,300 reductible to 3,000 for

immediate payment in advance. Therewas no contractual obligation to refund(although sometimes done in practice)


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Case: Arthur Murray(NSW)Pty Ltd vFCT(1965)114CLR 314 In the Companys accounts, advance

payments were treated as unearneddeposits-untaught lesson account

Thereafter they were transferred toearned tuition account in line withaccepted accounting practice. Thesewere recognized as income

The Commissioner disagreed and saidpayments (income) should berecognized when received


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HELD

..according to established accountingand commercial principles, in the caseof a business either selling goods or

supplying services, amounts receivedin advance of the goods beingdelivered or the services being

supplied are not regarded as income


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DERIVATION-Income(checklist) Trading income-accrual basis when the

right to receive results in a debt due. Salary & wages- cash receipt basis Brent

v FCT ATC 4195

Personal services - cash receipt basisBrent v FCT ATC 4195

Work in progress of professional person-not assessable until billed Henderson v

FCT 70 ATC4016. But a paymentreceived for unbilled work in progressmaybe regarded as assessable income-Stapelton V FCT89ATC4818; FCT v

Grant 91ATC4608


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Derivation-Income

Leave payments-assessable in year ofreceipt as with normal salary orwages- Case V161.88ACT1071

Interest- when received Rent-when received Case

A63,69ATC359

-prepaid rent-caseB47,70ATC236 and B51,70 ATC253

Dividends-when paid or credited to

shareholder


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Derivation-Income

Payments by cheque- received on thedate the cheque is received ortendered-case: Ullrich V

CIR(NZ)13ATD321 Advance fees- accounting basis

:Arthur Murray


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Matching principle

In determining when an outgoing isdeductible there is a two stepapproach (Coles Myer Finance):

Step 1: Determine whether a loss oroutgoing has been incurred(jurisprudential principle)

Step 2: Determine to which period theloss or outgoing is properly referable(matching principle)


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Estimated liabilities

The fact that the amount of a liabilitycannot be precisely ascertained doesnot necessarily mean that the liability

is contingent and therefore notdeductible (RACV Insurance,Commercial Union Assurance)

Documents

Capital Gains and Others