Week 01 LEGT2751 Notes 1. 4 INCOME TAX FORMULA AND CALCULATION OF TAX PAYABLE ss4, -5, -10, -15 – Shows how to calculate tax, and who should pay tax s36-10 – Explanation of a tax loss s251S – Medicare levy Tax formulas [2. 2-2. 3] income tax = (taxable income x tax rate) – tax offsets • Tax offsets – eg imputation credit from share trading, listed in s13-1 taxable income = assessable income – deductions Assessable income = ordinary income – statutory income o Ordinary income s6-5 – assessable income according to ordinary concepts o Statutory income s6-10 – assessable income according to provisions • General deduction – s8-1, specific deductions – s8-5 Types of income [2. 14] • If an amount is both ordinary and statutory income it is only taxable once (s6-. 25), and rules relating to statutory income prevail over ordinary income • More specific provisions prevail over more general provisions in ITAA36 only • Items that are neither ordinary or statutory are not income, and NOT exempt income eg gifts, not taxable s6-15

Keily v FCT – pension was considered ordinary income • “characteristics of income of whatever kind are said to include recurrence, regularity and periodicity” Income generally from: • Remuneration for personal services (rowe’s case) • Rewards from carrying on a business (cooling’s case) • Return on investment (slater holding’s case) Exempt Income [2. 24-2. 27] • Exempt income – income that is excluded from assessable income. Types: o Exempt entities [s11-5] o Income that is exempt [s11-10] o Certain income derived by certain entities – eg centerlink [s11-15] • Types of s11-15 exempt income: Defence force allowances s51-5 o Maintenance payments to spouse or child s51-50 o Educational allowances s51-10 o Certain foreign source income o Number of welfare payments Statutory Income [5. 1-5. 2] • Statutory income is legislated income, while ordinary income is judicial income • s6-10 is not an assessing provision, assessment mechanisms are the specific provisions • ITAA97 – statutory prevails over ordinary • ITAA36 – specific prevails over general Deductions [8. 1-8. 3] S8-1 – general deductions. Loss or outgoing from: • Gaining/producing your assessable income Carrying on a business for the purpose of gaining your assessable income Cannot deduct if: • Loss of capital nature • Loss of private/domestic nature • Loss associated in gaining exempt income, or non-assessable income S8-5 – specific deductions • Basically states that you can deduct an amount that a provision of the Act allows Tax Losses [9. 57-9. 60] • s36-10 – tax losses • tax losses are carried forward indefinitely until they are recouped – after 1989/1990 income year • tax loss arises when deductions exceed TOTAL income, not just assessable income Tax Loss = D > AY + Net Exempt Income (NEY) NEY s36-20 – all exempt income less non-capital outgoings/losses incurred in deriving income, less any taxes on the exempt income • Tax loss is first offset against: o Net exempt income; and then o Assessable income over deductions [s36-15] 1. 5 JURISDICTIONAL ASPECTS • 6-5(2) – For Australian residents, assessable income includes income from all sources, in or out of Australia • 6-5(3) – For non-Australian residents, assessable income includes income from all Australian sources • 6-10(4) – For Australian residents, assessable income includes the statutory income from all sources, whether it in or out of Australia. 6-10(5) – For non-Australian residents, assessable income includes all statutory income from all Australia sources. • 136-5,-10,-25 – related to non-resident CGT event treatment • S23(r) – Income derived by a non-Australian resident from a foreign source completely out of Australia is exempt from income tax Jurisdictional Matters [2. 31-2. 32] Australian residents are liable to tax on worldwide income, non-residents liability is only limited to Australian source income • Australia’s tax jurisdiction is based on residency and source • When resident gets foreign source income, its either exempt (s23AG or 23AH), or tax credit is provided for the tax paid CGT treatment • Non-residents can make a CG only is the event related to an asset having a necessary connection with Australia s136-10 – exposure only limited to assets specified in s136-25 (traceable Australian assets) o Subject to title in AUS Interest in them can be monitored in AUS o Physically located in AUS Eg o Land/buildings/structures o Assets used in carrying on a business through a permanent establishment in AUS o Share in private co o >10% share in public co o Option to acquire any of above Residency of individuals Four tests 1. Common law test – focus on where on resides 2. domicile test – born here, or shows intention of permanent stay 3. 183-day stay test 4. superannuation test • residency determined on an annual basis Residency of companies • co is incorporated in AUS carries on business in AUS + central mgmt and control in AUS • voting power controlled by residents in AUS Income Source Rules • wages, salaries and contractual payments o based on where work is done, not where contract is executed/payments • income from trading activities o based on place of the sale contract • interest o place where credit is provided 1. 6 FUNDAMENTAL INCOME TAX CONCEPTS 6-5(4) – OI is yours if you directed it 6-10(3) – SI is yours if you directed it 6-25 – SI over OI 8-1 – general deductions 8-10 – no double deductions S21 – non-cash consideration, money value = payment/gift

S21A – non-cash business benefit S26e – assessable income shall include allowances in relation to employment to the VALUE of the tax payer S51AH – deductions not allowed where expenses incurred by employee are reimbursed S96 – trustee not liable to pay income tax on trust property Income Concepts s6(1) [2. 5] Income from personal exertion – earnings, commissions, bonuses, pensions, superannuation allowances • does not include interest (unless in the business of lending, or business custom to collect interest in relation to debt), rents or dividends

Income from property – all income not from personal exertion Judicial Concept Income – “what comes in”, considered as a flow, not a gain • however not all inflows are of income in nature eg gambling • non-convertibility issue still a problem under this concept Tennant v Smith • Mr T occupied a rent-free house owned by the bank, the value of the rent was not assessed as income because of the convertability issue • This was an old English case, now there is no problem with convertability FCT v Cooke & Sherden FACTS: 2 partnerships selling soft drinks on door-to-door basis • Manufacturer had an incentive scheme to give free holidays to successful operators • Holiday rights were not assignable, and no entitlement to alternative compensation HELD: • Holidays were not income – if receipt of item saves a tax payer from incurring expenditure, the saving is not income according to judgment • S26e did not apply because benefit was not granted in respect of “employment or services rendered”. Rather, they were retailers (buyer/seller relationship), there was no employment relationship, nor contractors to the manufacturer

Profits, Gains and Income • Sometimes net income has the character of income in some circumstances (eg Whitfords Beach case), generally gross receipts are income Income according to ordinary concepts 1. Amounts not convertible into money are not ordinary income Payne v FCT FACTS: • Employee worked at KPMG used business flight travel to rack up Qantas frequent flyer points • Later she surrendered points to get tickets for her parents HELD: • Tickets not transferable, and not sellable. Cannot be converted into money ( not income! Statutory responses to convertibility issue s26e – aimed to overcome Tennant v Smith “the value to the taxpayer” – only EMPLOYEES are captured, hence N/A to Cooke v Sherdan s21, 21A – aimed to overcome Cooke v Sherdan • “arm’s length value” – captures business benefits 2. Capital Amounts do NOT have the character of income Reasons to distinguish capital from income: (first 2 are income related, 3rd – deduction related) • Sale of capital asset generates a capital receipt (tree) – OI does not include capital receipt, it must enter through SI • Capital receipts that generates capital gains are assessable under ITAA97 Div100 • Losses and outgoings of capital nature are not allowable deductions approaches to distinguish income from capital • Dixon criteria – Sun Newspapers Case o Receipts arising from the ordinary operation of a business will be income receipt o Receipts relating to the loss or destruction of the profit-making structure will be capital in nature • Mere realization – California Copper Case {covered in latter weeks} • Nature of consideration given for the receipt o Basically examine the consideration provided by the recipient of money o Federal Coke Case – compensation payment was of a capital nature in the hands of the taxpayer • Fixed and circulating capital

Unliquidated damages • Problems arise when a lump sum is paid for compensation of damages, however the apportionment of the lump sum payment is not itemized McLaurin v FCT FACTS • Grazer suffered damages to property and livestock due to fire sparked by railway engine • Was paid a lump sum payment of 12,350 pounds, not knowing how it was calculated HELD • Lump sum was not apportionable, no part of it was assessable Illegal Activities • Gains from such activities are OI 5. Mutual receipts are not income • Mutual receipt – when you pay yourself and derive a profit/loss – not classified as OI . To be income, an amount must be beneficially derived • To be income, an amount must have come in in the sense that it is beneficially derived 7. Income is to be judged from the character it has in the hand of the recipient Federal Coke Co Pty Ltd v FCT FACTS: • Bellambi was the parent company who had a contract to sell coal to Le Nickel • Le Nickel defaulted on supply contract and paid $1mil in compensation to Federal Coke (subsidiary of Bellambi that supplied the coal to Bellambi to sell) • Federal Coke’s activities then ceased

HELD: • Compensation was capital in nature (a gift or a windfall in the hands of FC), even though the amount would have been income if paid to Bellambi • According to current tax laws, this would have been income to Bellambi under s6-5(4) where it will be OI when “it is applied or dealt with in any way on your behalf or as you direct” Constructive Receipt • 6-5(4) operates to consider constructive receipts – when other entities constructively give you income – eg banks credit interest in your account *zobory case, myer case – not covered