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Lecture notes, lectures 1-13 - Includes text book and tutorial notes

Tutorial Questions and Answers also included

Taxation Law – James Cook Uni

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2017 July 6

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Table of Contents Week 2: Derivation of Income ............................................................................................................... 14

Taxable income: .................................................................................................................................

14

Ordinary income: 6-5(1) ................................................................................................................

14

Statutory income: 6-10(2)..............................................................................................................

14

Exempt income: .................................................................................................................................

14

Road Map: ......................................................................................................................................

14

NON-ASSESSABLE NON-EXEMPT INCOME: .......................................................................................

14

Assessable income: ............................................................................................................................

15

Courts view on income: Jordan J in Scott (1935): ..........................................................................

15

Statutory income: ..............................................................................................................................

15

Income: ..............................................................................................................................................

15

General Principles: .............................................................................................................................

16

Mutual payments: ..............................................................................................................................

16

Income of clubs: .................................................................................................................................

17

Gain concept: .................................................................................................................................

17

Windfall gains: ...................................................................................................................................

17

Gambling winnings; and ................................................................................................................

17

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Legally disabled: .................................................................................................................................

99

Features of trusts: ..............................................................................................................................

99

Outline of the calculations**: ............................................................................................................

99

Present entitlement

.........................................................................................................................100

2 statutory extensions of PE:

.......................................................................................................100

Presently Entitled and Non-Resident at the end of income year ....................................................101

Taxation of minors

...........................................................................................................................101 LOW INCOME TAX

OFFSET:..............................................................................................................101

s 99A - WHERE THERE IS NO PRESENTLY ENTITLED BENEFICIARY - SCHEMES TO AVOID TAX -

RESIDENT TRUST ESTATE

.................................................................................................................102 s 99 - No Beneficiary

Presently Entitled - Resident Trust Estate .....................................................102

ANTI- TAX AVOIDANCE MEASURES .................................................................................................102

Week -1 Basic Concepts

Taxing power:

Each state has taxation laws (stamp duty, employee tax, land tax)

Commonwealth also has power to impose tax (Cwlh Constitution s.90).

According to s.90, there is exclusive taxation power for customs and excise duties.

• Customs: import tax on goods

• Excise: tax on point of production

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s.51: concurrent power means that the state and the commonwealth has powers of

taxation.

s.109: states that if the laws are inconsistent, then the cwth will prevail

TAX: it is the compulsory extraction of money by public authorities for public

purposes, imposable by law and is not rendered for goods and services.

In order to stop states from imposing tax, the federal government started a

“Uniform Tax Scheme” and it unfolded in 4 steps

• A Rating Act - set Federal Income Tax rates so high people could not pay both

Federal and State taxes.

• An Assessment Act – giving the Federal Government priority in payment

(enforceable under s 109 of the Constitution).

• A Grants Act - reimbursing the states for lost revenue provided they did not

raise their own taxes.

• An Arrangements Act - empowering the Federal Government to take over the

premises, staff and records of the various State Tax Offices.

The limits on federal legislative power:

1. The law must be one with respect to taxation (s 51);

2. The law must not discriminate between States or parts of States (s 51);

3. The Federal Government may not tax State property (s 114); and

4. The law must deal with one subject of tax only (s 55).

Taxing statutes:

• The Assessment Acts

• Other (the Rating Acts, Taxation Administration Act, International Tax

Agreements Act etc)

The extraction of tax is based upon characteristics (substance)

• s.81: sets up the consolidated revenue funds. It is a fund where the

government puts the tax collected

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• s.83: to spend this money the government has to pass an ACT

Tax extracted don’t necessarily have to go into the fund

• Lution V Lessle: Child Support Assessment Act, the High Court said that the

money collected is not tax because it is collected to pass money from one

parent to another.

Who do we tax?

Those with sufficient association with Australia through:

1. Residence

a. Residents: are taxed on world-wide income

b. Non-residents: taxed on Australian source income

2. Source (of income)

Resident of Australia means:

Common law test: s61 “reside”

Domicile test: the legal relationship between you and your country o

Origin: when you are born o Choice: migration o Dependency

Resident whose domicile in Australia convinced place of

permanent place of abode elsewhere

(a) a person, other than a company, who resides in Australia and includes a person:

(i) whose domicile is in Australia, unless the Commissioner is satisfied that his

permanent place of abode is outside Australia;

(ii) who has actually been in Australia, continuously or intermittently, during more

than one-half of the year of income, unless the Commissioner is satisfied that his

usual place of abode is outside Australia and that he does not intend to take up

residence in Australia; or (iii) who is:

(A) a member of the superannuation scheme established by deed under the

Superannuation Act 1990; or

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(B) an eligible employee for the purposes of the Superannuation Act 1976; or (C)

the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or

(B).

The resident tests are:

1. The Common Law test;

2. The ‘domicile’ test;

3. The 183-day rule; or

4. The superannuation test The common law test:

• This is the primary test and is sued for people entering into Australia

• Tax Ruling 17: residing is when the person lives permanently

The domicile test: (applies for outgoing individuals) The

domicile test – part 1:

a. If their domicile is in Australia

i. Categories:

1. Domicile of Origin

2. Domicile of Choice

3. Domicile of Dependency The

domicile test – part 2:

b. Permanent place of abode: a place of abode that is other than

merely temporary or transient Cases:

Applegate Case: went to Venezuela indefinitely for work. He gave up his Sydney

apartment and rented one abroad. He came back for medical reasons and stayed.

Verdict: he did not have to pay tax on Venezuelan salary

Jenkins case: Transferred for 3 years, when he left attempted to sell everything,

retained bank account and had to return due to illness.

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• IT 2650: factors that determine permanent place of abode looks at intended

and actual period of abode in foreign.

• 2 or more years is considered substantial

• Also need a place abroad that’s more than temporary

183 Day rule:

• Must be present for one half of the year of income.

• Also must have a usual place of abode and don’t intend on staying in

Australia. Eg: house/rental property.

Case 19: Australian from the 184th day

Groves case: only considered Australian for the days actually in Australia Source

is determined by:

1. Particular statutory rules

2. Common law source rules

Source: the source of particular income is practical hard matter of fact. Determined

by what a practical person would regard as the real source of that income.

• Case: Nathan v FCT (1918) 25 CLR 183

• Therefore, we look at the facts to see where the $ is sourced from Common

law source rules:

1. Personal services income

a. Where the services are performed

b. Where the contract was negotiated OR

c. Where payment is made

• FC tv French: normally where you do the work is where it is performed

• Mitchum Case: French is not the only rule. You must look at all the factors.

2. Interest income

a. Sourced in the place where the credit is provided

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i. Place of contracting

ii. Place where the funds are advanced

• Spotless case: the above points occurred in Cook Island, Spotless did not win

3. Dividend income:

a. Sourced where the shares are held

b. s.44: the source of the dividend is where the profits from

which the dividend is paid were derived. BUT it don’t permit TRACING of

profits Taxation equations:

• income tax is for each financial year IT = (taxable income x rate)-offsets

• Taxable income = Assessable income – deductions

READ THE T BOOK AND MAKE NOTES Assessable

income:

Assessable income is income that can be taxed, provided you earn enough to exceed

your tax-free threshold. Examples of assessable income are: salary and wages.

Interest from bank accounts, dividends and other income from investments

Gross income = all ordinary income + all statutory income Assessable

income:

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Exempt income:

• income of ‘exempt entities’ (List in s 11-5); and income which is exempt

(List in s 11-15).

Non-assessable non-exempt income:

• Non-assessable, non-exempt income is ordinary or statutory income that is

expressly made neither assessable nor exempt income (see s 6-23).

• Income so categorised has no tax effect whatsoever for the receiving

taxpayer

Deductions:

Deductions reduce the income on which you are liable to pay tax.

They are expenses you incur in the course of earning your assessable income

OR

Other outgoings specifically made deductible by the Act (eg gifts to charities).

Examples include:

• for businesses – rent, wages, cost of raw materials, marketing and

advertising, transport etc

• for individuals – cost of work related items (tools, briefcases, reference

books etc), trade union fees, some self-education costs etc.

Tax offsets reduce tax payable, but do not reduce assessable income.

Examples:

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Foreign income tax offsets (‘FITO’s – what were formerly called ‘foreign tax

credits’);

Franking credits on dividends;

Rebates for family situations (eg dependant (invalid and carer) tax offset, low

income rebate);

Rebates for some expenses (eg medical expenses).

Week 2: Derivation of Income

Income tax is paid for each financial year

Taxable income: Assessable income – deductions

Ordinary income: 6-5(1): it is income according to ordinary concepts

Statutory income: 6-10(2): amounts that are not ordinary income but are included in

your assessable income by provisions about assessable income.

Division 10 has a list of provisions about assessable income

Exempt income: Will be exempt if made exempt by a provisions of the ITAA or another

commonwealth act. s6-20 (1)-(3).

An amount that is non-assessable, non-exempt income is NOT exempt income. 6-20

(4).

Road Map:

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11-5 gives a list of who the tax payer is (entities that are exempt no matter what

kind of income they have)

11-15: gives a list (identify the income and whether it is exempt)

NON-ASSESSABLE NON-EXEMPT INCOME: 6-23: an amount of ordinary or statutory income is NSNEI IF a provision of the ITAA

specifically makes it neither assessable income nor exempt income. GST

Sub division 11B has a list on the NANEI

Assessable income: ITAA deems some receipts to be “income for taxation purposes (non-cash business

benefits, tips, post 1985 CG).

Courts view on income: Jordan J in Scott (1935): Determined in accordance with the ordinary concepts and usages of mankind except

in so fa as the statute states or indicates an intention that receipts which are not

income in ordinary parlance are to be treated as income.

Ordinary usage of mankind is not fixed: Blake 1984: this concept changes

overtime because of the way we live and conduct business also changes.

Statutory income: Receipts that would NOT be income under ordinary concepts but which are included

under ordinary concepts BUT which are included in come because of some provision

of a taxing statute make them income. SEE 10-5.

Income:

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business

transactions

• Whether an amount is income “depends upon its quality in the hands of the

recipient” Case: FCT v McNeil [What is it to you: receiving person]

• Receipt must be income in the hands of the tax payer [Federal Coke v FCT]

General Principles: i. It must ‘come in’ to the taxpayer (FCT v Cooke and Sherden).

a. It has to be a gain that comes i

ii. Not everything which comes in is necessarily income:

a. Mutual payments

b. Realised gains: the normal proceeds of personal exertion, property or

business are income

i. Windfall gains are not considered income

c. Capital receipts

iii. It must be money or something convertible to money.

a. Otherwise STAT income

iv. It often exhibits characteristics of periodicity, regularity and recurrence.

v. Income substitution or compensation payments may be income.

Income

Personal Exertion

Business

Profit Mak ing Scheme s

Ordinary

Property

Trading Stock

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vi. Illegal, immoral and ultra vires receipts may be income.

a. Ultra vires: business does something outside their scope. Money made

from bad things is still income It must come in:

• Generally for an amount to be income, it must come In to a taxpayer.

o Tennatn V Smith; FCT v Cooke and Sheriden

• A gain that is not just a saving

• There are cases where regular savings can be income i.e. a discount

Mutual payments: • Taxpayer cannot derive taxable income from payments to him/herself

[Bohemians Club V FTC] (Federal Tax Commission)

• It must be a source outside the taxpayer

• Income from business activities aimed at producing a profit and from

nonmembers is taxable.

• Mutual insurance Ltd v Hills 1923 o If there is complete entity between those

who contribute and those who benefit taken as a class, the receipts are not

income

• Complete entity: all members put money into a common fund and be able to

participate in a surplus and all participants should be part of that surplus.

• Payment for the drinks food etc is not income for the club. But trading

between the club and the member’s business, then it is considered income to

the club.

• Payments by non-member to the club is considered income

Income of clubs: • Is the receipt exempt income?

• If not, the ‘Mutuality Principle’ produces three (3) possibilities:

a. the receipt is wholly exempt because it comes from members;

1. wholly execluded: member itself (there is a complete entity)

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b. the receipt is wholly taxable because it comes from sources outside the

club;

1. Wholly taxable: member dealing as a different business

c. the receipt is partly assessable because it comes from the general

trading activities of the club which cannot be sourced to members

alone.

1. Partly: club meals. If you buy drinks form the bar, they don’t

keep track, so they portion it based on a formula between

members and non-members

Gain concept: Tax law only recognises realised gain. Not all gains are considered income due to the

CGT and Income Tax.

Windfall gains: Windfall gains fall into two main categories:

Gambling winnings; and

Gifts. They are generally not taxable unless in the case of gambling proceeds) they are the

result of income earning related activity (eg a ‘business of gambling’).

Brajkovich case: discusses whether the tax payer was running a gambling business

then the gambling winning will be ordinary income. He was considered as not

running a gambling business.

Gifts: that you get… are bonuses gifts? If the gift is because of your service, then

they will make it ordinary income under 6-5. But if they simply give it to you. Then it

won’t be ordinary income.

Capital Receipts: Capital and Income (tree and fruit analogy)

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Capital receipts are not taxed unless covered by the CGT provisions

Capital gains tax will be a stat income under net capital gain. Before doing that, you

can get a discount of 50%.

Tree and Fruit principle: THE TREE RPOVIDES THE FRUIT. SO THE FRUIT IS THE INCOME AND THE TREE IS

THE CAPITAL.

Casse: Eisner v Macomber: look at the receipt and say is it flowing or is it the tree?

A. Salary would be income and you are the (tree) capital 6-5

B. Sales is fruit and business is the tree

C. Sale of tree is capital and is considered capital gains tax. See if you can get a

discount.

Some circumstances a property can be a flow from the business.

Cash or cash convertible property:

According to ordinary concepts, to be income the receipt must be in the form of

money or something convertible into money.

Otherwise it’s not ordinary income.

2 scenarios:

1. Employer and employee relationship and the year gives a benefit not

convertible to cash use tenant v Smith. The tax payer employed by the bank

and bank said you can live upstairs, if you don’t live in it you lose it can’t

sublet it etc.. So had to occupy or loose that benefit. The English revenue a to

LOOKED TO SEE THE VALUE OF USE is assessable. Court: its not ordinary

income coz he had to use the premise coz he couldn’t convert it.

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2. Non-employer employee relationship Cooke. Involved 2 payers who earned

by selling soft drinks from a truck. They were a business. The manufacturer

had an incentive scheme if you sell an amount you will get a holiday. They

reached and got a holiday. The price can’t be taken as money and can’t be

transferred to anyone else. Is the prize ordinary income? No as it can’t be

convertible.

There is a revenue loss for the gov and they want to recoup this situation. Now s26c

and we don’t have to study it. Now it is 15-2 Cash or cash convertibles:

s15-2 it would be income to the value to you. This hasn’t worked very well as the

value to you. It is subjective test. Only purpose is if it a monetary thing.

Employer and employee if it is fringe benefit. It is a benefit on top of salary. It is non

assessable non-exempt in income tax s23L.

s21A: non-cash. Takes into account non E & E. a business relationship and give each

other benefits that’s not convertible. Cooke and Sheridan to say its not 6-5.

RECAP:

21 and 21 A is business relationship. It don’t create a stat income.

23L is on what is non assessable non-exempt – fringe benefit.

21 deems the paid amount at arm’s length.

21A: deals with it as convertible to cash. Still under

The amount you include is at arm’s length value. So if the receipt contributes

something to the value, it is subtracted. You would also exclude restriction of the

conversion of benefit to cash

Sub 3: if it is a once off deduction, then it can be reduced by the deductable %.

Explanation:

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SCHOOL OF LAW/SCHOOL OF BUSINESS

JAMES COOK UNIVERSITY

BX3112/ LA4023:03

TAXATION LAW

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WORKSHOP QUESTIONS

FIRST SEMESTER 2017

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Workshop 1

1. In what situations will an individual be regarded as a resident of Australia for taxation purposes?

They would have to satisfy one of the three tests. The domicile test, the 183-day rule and the superannuation test. A person whose domicile is in Australia is a resident of Australia, unless the commissioner is satisfied that the person has permanent place of abode outside Australia. If a person who is actually in Australia, continuously or intermittently, during more than half of the year of income is a resident of Australia unless the commissioner is satisfied that the person’s usual place of abode is outside Australia and the person does not intend to take up residence in Australia. A person who is a member of a superannuation scheme established by deed under the superannuation act 1990, an eligible employee for the purposes of the superannuation act 1976, or a spouse or child under 16 of such a person is a resident of Australia.

2. An Australian born taxpayer obtains a three-year contract of employment with a firm in Hong Kong commencing 1 April. He does not intend to remain in Hong Kong after that period and envisages moving to the United Kingdom. Unforeseen circumstances result in him returning to Australia after 18 months on September 30. Is he a resident or non-resident for Australian taxation purposes during the period he is absent from Australia? Explain your answer.

He is a non-resident for the 18 months he is spent abroad, as his income is coming from hong kong. He will have to start paying tax if he starts earning income in Australia

What if he only intended to live in Hong Kong for 18 months and then move on to the United Kingdom?

He is a non-resident for the 18 months he is spent abroad, as his income is coming from hong kong. He will have to start paying tax if he starts earning income in Australia. 3. Are the following receipts taxable in Australia:

a. $5,000 earned by Ailsa, a non-resident, from investments in the US; no

b. $5,000 earned by Bert, a non-resident, from investments in Australia; yes

4. Explain the difference between an ‘allowable deduction’ and a ‘tax offset’? Provide three (3) examples of tax offsets. (A full listing appears in the Table at the start of Chapter 15

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in the Master Tax Guide available through the CCH/Intelliconnect website – see access instructions in the subject outline).

Allowable deductions allow you to claim expenses that are directly related to earning your assessable income. If you make a purchase or use an asset for both business and private purposes, you can only claim a deduction for the business portion of the expense. A tax offset or rebates directly reduce the amount of tax payable on your taxable income. Offsets can reduce your tax payable to zero but they can’t get you a refund.

5. Find the commentary on the CCH/Intelliconnect website on section 6-5 of the Income Tax Assessment Act 1997 dealing with whether gross or net receipts can be included in assessable income under section 6-5. In a few words, what is the answer?

Can the gross receipts used in the calculation of the net profit be classified as income in ordinary

concepts? If it can, then according to Hill J, assessable income will be determined by reference to

the gross income receipts of the rule.

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Workshop 2

Income: General Principles

1. Are the following receipts by an Australian resident taxpayer part of his or her assessable

income? Give reasons and cite cases where appropriate.

a. lump sum damages for personal injuries suffered in a motor vehicle accident; No, because the damages received by the tax payer will only be used for the injuries caused by

the motor vehicle, it won’t be used for his own personal gain.

ISSUE

Do lump sum damages awarded to an Australian resident taxpayer TP for personal injuries from a

motor vehicle accident form part of her or his assessable income?

RULES/PRINCIPLES

At common law, compensation payments take the same character as the receipt that they replace

(C of T (NSW) v Meeks (1915) 19 CLR 568). Where the compensation is for a loss of present

and/or future earnings, it is income (Tinkler v FCT 79 ATC 4641). Where the amount is instead to

compensate for a person's loss of earning capacity, this is capital in nature (Slaven 84 ATC 4077;

TR2193/85). If a lump-sum amount forms compensation for both loss of earnings and earning

capacity, the courts will apportion the amount if possible (Spedley Securities 88 ATC 4126;

National Commercial Banking Corp 83 ATC 4715; CSR Ltd 2000 ATC 4215) or deem it all capital

if not (McLaurin v FCT (1961) 104 CLR 381; Allsop v FCT (1965) 113 CLR 341).

APPLICATION

Here, the TP has suffered damage but it is not clear if this is for loss of capacity (the ‘tree’) or loss

of earnings (the ‘fruit’). If there is no forensic method to apportion this, McLaurin and Allsop

suggest that the amount will be on capital account

CONCLUSION

With no further information to apportion, the amount will not form part of AI in the ITAA97 6-5.

b. workers’ compensation payments for loss of income;

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Compensation payments take the character of the receipt they replace (FCT v Meeks) as the

worker was compensated for the loss of income, this is regarded as income and therefore is

taxable.

Issue

Do workers’ compensation payments to an Australian resident taxpayer (TP) form part of her or

his assessable income?

Rules/Principles

As above, compensation takes the same character as the receipt that they replace (Meeks) and if

it is for loss of present and/or future earnings, it is income (Tinkler).

Application

Here, the amount is clearly expressed to be to replace income (the “fruit”) and is therefore income.

Conclusion

The amount will form part of AI under the ITAA97 6-5.

c. an honorarium received by the secretary of a club;

A gift is not part of a tax payer’s ordinary income. For it to be part of their assessable income it

must have recurrence, periodicity and regularity. Since the honorarium was given to the secretary

as a gift, it is unlikely that they will receive another payment.

Issue

Will an honorarium received by the secretary of a civic association (an Australian resident taxpayer

TP) form part of her or his assessable income?

Rules/Principles

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A payment for services rendered is ordinary income if it is an allowance or gratuity received in

relation to services rendered (ITAA36 s 6(1); ITAA97 6-5(1)) but reimbursement of expenses is

not (FBTAA86 s 136(1); ITAA97 div 20-A; TR1992/15). A gift is statutory income if it is a benefit,

allowance, or gratuity provided to a TP in respect to services she or he has rendered (ITAA97 15-

2). A gift with no nexus to a service rendered is a windfall gain and not accessible (Squatting

Investment v FTC (1953) 86 CLR 570; Scott v FCT (1966) 117 CLR 514; ITR2002/644).

Application

Here, the amount is arguably for services rendered and relates directly to the performance of this.

Conclusion

The amount will form part of AI under the ITAA97 6-5 or 6-10.

d. tips received by a waitress; Issue

Will tips received by a waitress (an Australian resident taxpayer TP) form part of her assessable

income?

Rules/Principles

A payment for services rendered is ordinary income if it is an allowance or gratuity received in

relation to services rendered (ITAA36 s 6(1); ITAA97 6-5(1)). A gift is statutory income if it is a

benefit, allowance, or gratuity provided to a TP in respect to services she or he has rendered

(ITAA97 15-2).

Application

Here, the amount directly relates to services rendered and is either statutory or ordinary income.

Conclusion

The amount will form part of AI under the ITAA97 6-5 or 6-10.

e. a $1 million prize in Gold Lotto. Issue

Will a $1 million prize in Gold Lotto received by a TP (an Australian resident) form part of her or

his assessable income?