Deductions: division 8-1; any losses in the course of your work. Division 26 denies certain deduction Division 25 gives you specific deductions Tax Rate: what determines the rate: The financial year changes every year so you need to make sure your rate is for the correct year. So you can try and play with timing. What is your status – are you are resident(taxed on worldwide income) or a non-resident (only taxed on Australian sourced income) Non-Residence and source – is the income sourced from australia or someone else.
Status: are you a corporation, am I a family trust company, is it a self-managed super fund (only taxed at 15c in the dollar) – once you turn 60 it is tax free, are you a child beneficiaries. Franked dividends (franking credits) – is the tax that has already been taxed by the company issuing the dividends. Fringe benefits tax (non-assessable, non-exempt income): A separate tax ruling for non-cash benefits – you are getting taxed at the top rate + the medicare levy. (Sep 1987) GST (Introduced 2000) – you get taxed on your outputs (services) and credits on your inputs (e. g supplies).
Therefore the end user gets lumped with the lot. To work out the tax you divide by 11. Basis of tax 1. Income 2. Consumption – if you consume a lot you get taxed 3. Wealth Residents have to pay the medicare levy, although non-residents pay tax from the 1st dollar incurred only on Australian income + they don’t have to pay the medicare levy. Week 2 notes Ordinary Income The general principles in defining ordinary income is that it must Comes in to the recipient: this is income of what comes in, and not what is saved from going out FCT v Cooke and Shereden Federal Coke co V FC of T.
Must recognise it as income Characteristics as such a time of derivation – Income will be treated as have been derived if it has been taken that to have received the amount as soon as it is applied or dealt with in any way on your behalf Constable v FC of AT (my book pg119) Brent v FCT (pg122 Australian tax 2012 book) – also illegal activities as well Other concepts of ordinary income Convertibility into money- non-cash benefits that are not convertible into money are not deemed to be income, although section 21A has over-ruled this for non-cash business benefits.
– generally these will be classified as fringe benefits. (note: first $300 is exempt income) FCT v Cooke and Sherden – created this loophole. In considering this if you are a volunteer life saver and someone gives you a wrist watch then this is not classified as income, although if you were a paid life saver then this would be considered as income under S21A. Although if they gave you a medallion it would probably not be considered income as you can’t really put a value on that. Principle of mutuality – You cannot earn income off yourself – it must be derived from an external source.
Periodical Gains have the character of income: one of the most common characteristics of income is if it is frequent and periodic. FCT v Dixon – Military service, where the government substituted his lower wage. Held to be income because of the regularity of payments, even though there was no connection between services rendered. Although it was not considered a gift as the payment was expected (not one unexpected). FCT v Blake (pg173 Australian tax 2012) Heavy minerals v FCT – (income tax law book pg37) – this is an exception it shows how a once off payment can still be classified as income and not a capital nature).
Sufficient nexus with earning activities Windfull gains – these are unexpected lump sum gains Gifts – Are assessable income if they are made voluntary and without obligation because of some employment or services rendered e. g. – Tips received by a waiter – A student gives his teacher $100 in appreciation for teaching. Mere Gift – they are prima ficie. (not assessable) Are not assessanle income if they are made voluntary and without obligation but are independent of any employment or service rendered. – A student gives his teacher $100 because they like there teacher – Birthday, wedding and Christmas presents.
Gifts are not income unless they possess other characteristics of income, such as regularity of payments (Dixon), relation to employment, income earning activities and the motive of the payment is all important. -Scott v FCT – lawyer case (pg 167 Australian tax law) -FCT v Harris – received a $450 ex gratia payment as goodwill gesture to offset inflation following his retirement – not income as it is unexpected voluntary lump sum payment. More details behind this case: – It was not a product in the relevant sense of the taxpayers former employment – Not related to the length or quality of service – Not periodical.
– The taxpayer did not rely on it to maintain himself or his independents – The payment was not a substitution of payment forgone – Not incidental to any current employment – Hayes v FCT: a former employee made substantial gifts of shares to the tax payer, the tax payer over the years had been providing a service although it was found that a friendship had existed and there was no evidence that the shares were remunerating the person for the services conducted. Voluntary payments/ rewards: To distinguish between giving a reward to someone as being income or just a gift you need to consider: – was the reward given for the services conducted.
(harris and scott case) – Issuing rewards which are regular will constitute an income (Dixon case) – Issuing rewards that are expected; relied upon even though not in the course of your work will constitute as an income (Dixon) Tips are considered income because they are a voluntary payment as a reward for your services. Competition and prices: One off appearances this will not constitute as income, although regular appearances Gambling / Lottery winning: not income as they are lump sum payments, isolated, unexpected and have a degree of chance.
Although it could be argued that a bookmaker could consider the winnings as income. Capital Gains – this is not ordinary income, it is statutory income Must be an element of a gain: Generally there must be some element of gain to the taxpayer in order for it to be classified as an income Lees and Leech pty Ltd v FC of T (refer to Australian tax case book) Compensation Payments: Depending on the situation they can be classified as ordinary income or statutory income (capital gain). If the courts are compensating you for loss of income then it is ordinary income.
Although if they are rewarding you money on a lump sum due to your personal injuries then this would be of a capital nature (see question and answer book Q2. 4(2) Restrictive Covenant: Normally Capital in nature (there are three exceptions) WK3 notes Payment of services is income – i. e. the Brents Case; sale of property is capital although she didn’t have a copyright on it so there was no property to be sold. Source rules Source rules depends on the type of income: Although generally they will focus on: – Place where services are performed – Place of contract – Place of payment
Personal exertion income: – Generally from the place you actually provide the service from – French’s case – Although factors such as the place of negotiation and the signing of the contract or place of payment may be relevant where someone exercises a special skill (which are generally acquired over years of experience) – FCT v Mitchum case. Interest Income: Generally interest is sourced from the location. Although two cases “Commer of IR v Phillips Gloeilampenfabrieken” and “FC of T v Spotless services” state that interest is sourced from where the credit is provided or contracts have been formed.
Dividends: The source of the profits by which the dividends have been paid (note this is not necessarily from where the dividends actually originally came from). Esquire Nominees v FC of T (pg 1266 of my text book) What this case was about is that the dividend flowed through a numerous amount of companies – it was held by the courts that the end user was the source and not the original company who issued out the dividend. Property: The location of the property will be the source “Rhodesia Metals (pg1263).
Shares: The source of the profits and losses from the sale of the shares – there could be two sources “AMI case”(pg1262) Business, sales and rental income: Generally where the trading activities take place Fringe Benefits Tax Non-assessable non-exempt income Fringe benefits tax is a separate tax imposed on the employer. Prior to this tax employees were getting away with tax free income because section 15-2 valued non-cash benefits as, “the value to you”. This is was open to much interpretation. The value of one item to another person differs. E. g.
if I gave you a meat pie but you are a vegetarian for example then this is of no value to you. The employer pays the tax on your behalf – this is to try and avoid the disclosure issues previously we had. FBT year runs between 1April to 31March. Pay top marginal rate 46. 5% Division 13 – lists a number of exempt benefits. Division 14 – lists Reductions Then each specific division e. g. division 2 would list its own exemptions within this division as a section. Reportable fringe benefits are where the aggregate of each individual benefits exceeds the value of $2000.
If they don’t exceed this value then they are not reported on the your PAYG summary. So you don’t have to pay FBT tax on this. Although once reported on the PAYG summary sheet it does not form part of your taxable income although it is used to determine your medicare levy surcharge(assuming you have not private health insurance), HELP repayments, mature age worker tax offset and child support. Without any specific rules, it is likely that fringe benefits would be assessable income under section 6-5 or 15-2. In addition a exempt benefit under the FBT are not included under 6-5 and 15-2.
Calculating a fringe Benefit. 1. Is there a fringe benefit 2. Calculate the taxable value. Identify what the benefit is Is this exempt (division 13 (we need to know:58H,M,P,X,Y,Z, or specific division of an item) Can the taxable value be reduced? Otherwise deductible rule – if the employer by buying the benefit with its own money could have claimed a tax deduction then this is reduced out of the benefit. Now this is only applicable to “once only deductions” not items that are depreciable over many years. Reduction amounts – Division 14 lists reductions + 3.
Gross up the value if any Type 1 – if the employer eligible to claim GST credit (2. 0647) Type 2 – not eligible for GST credit (1. 8692) Employers are required to ‘gross up’ the value of the benefit provided as income tax is not paid on fringe benefits. The ‘grossed up value’ of the benefit is the amount that you would have received in your gross salary (taxed at the highest marginal rate of income tax plus medicare levy) in order to pay for the benefit yourself in after tax dollars. Example – grossed up value (type 2 example) As an example, say you were provided a benefit valued at $2,500.
The highest marginal tax rate plus the medicare levy for the year ending 31 March 2011 is 46. 5 per cent. The grossed up amount that would appear on your payment summary would be $4,673. You would have received $4,673 in your gross salary to pay for the benefit in after tax dollars i. e. $4,673 less tax of $2,173 is $2,500 Note with the type 1 benefit we also have to allow for the provision of GST to be included. Because since the company can claim the GST back in essence the privately owned person would had really had to pay for the gst in it…. So we should have for this as well.
4. Calculate the FBT: grossed up values multiply by 46. 5% CALCULATION OF SPECIFIC FRINGE BENEFITS Note: Always round our values up until we get to our we apply our 46. 5%, then we use two decimal places. Division 2: Car Fringe Benefit: A car is taken to be deemed for private use when: Actually used for private use Available for private use of the employee (i. e. garaged at their home) Exemptions: Exempt vehicles: taxi, panel van or utility truck Unregistered cars Division 13 N/A Reductions: These are built into the formulas. Two methods to work out Taxable value:
Statutory method: This is the default method. This applied automatically unless you elect for the operating method. However if the operating method gives a higher value than the statutory for tax purposes you have to use the statutory method. Operating cost basis: This results in a lower taxable value although greater record keeping required (requires a logbook) Statutory Formula (section 9) (A x B x C) – E D A: Base cost of the car (inc GST) + any non-business accessories B: Statutory tax rate (refer to the two tables) (total km’s used not private use km’s).
This works through annualised kilometres so if you get a car not for the entire year you need to work out your km using the following formula: “Number of km in actual period x (*365/days car held by employer)” Now with this correct km range we can apply the appropriate statutory rate. C: How many days employee held the car in the FBT year D: 365 or 366(leap year) use 366 if we go past February as the leap year increase the days in feb E: any employee contributions (fuel, repairs, etc) Operating Cost Method (section 10 of Division 2) C * (100%-BP) – R.
“Note that this formula apportions private use to business use” BP = How much of the kilometres were business km’s (calculate to 2 decimal points) R = Contributions made by the employee C = Total operating costs/running expenses: Includes repairs, maintenance, fuel registration, insurance, Depreciation & imputed interest OR Lease payments (if not bought) Depreciation calculation: A*B*C/D A: depreciated or base value of vehicle(include non-business expenses) B: rate of depreciation (see charts) C: no. of day’s vehicle was held within the FBT year D: 365 or 366.
Now once we calculate our depreciation we need to take out our private usage aspect. A x (B / C) A: Depreciation calculation calculated above B: no. of private days used C: no. of days vehicle held (i. e. same value as “c” above) Imputed Interest Uses the same formula as depreciation but for the first “B” we use our interest rate from the tables provided. Division 3: Debt Waive fringe Benefit What this is, is say your employee gives you money and then later says ohh don’t worry about paying me back. Then you will pay 46. 5% tax on the amount of money you used for private use once you gross it up by type 2.
There are no exemptions or reductions for this benefit. Division 4: Loan fringe Benefit This is the case where a company loans you money at a cheaper interest rate than you would normally receive. Loan is defined as any advance in money. If the loan is waived then it will fall under division 3. Exemptions 1. The loan is made solely for the purpose of meeting work related expenses. (17(3) 2. Sole purpose of the loan for the employee is to pay a rental bonds and utilities fees for temporary accommodation and is to be repaid within 12months.(note: how this is also exempt under expenses for living away from home allowance).
3. The provider of the loan makes loans to the general public typically (i. e. if you work for a bank), and the rate charged would be the same as what you would charge in arm’s length to a normal external client. So if you charge your employee 3% and the market is 7% then this exemption doesn’t apply and you must use the normal rate on the table given to us. (section 17(1) or 17(2) – basically one is a variable loan; the other a fixed loan) Reductions 1.
Otherwise deductible rule: If you use a percentage or some of it for income producing purposes then this is taken away from the taxable value. Note: if used 100% for income producing purposes then FBT is zero. 2. Recipient contributions. General formula to work out the Taxable value before any reductions are made. TV = loan amount x (Market interest rate – actual interest rate) x X/365 (or 366 leap yr) Less otherwise deductible rule (just replace loan amount with income producing portion) “Note a leap year occurred in FBT years ending 2008, 2012, 2016, 2020” Division 5: Expense fringe Benefit.
Either the employer pays for a expense or Makes a reimbursement is an expense fringe benefit- so you are reimbursed “precisely” for the money you spent on an item. An allowance is under statutory income 15-2 (assessable income), so you are given an amount of money to cover and “estimated” expense, this money can be used at your discretion (so you might use it for other expenses). Exemptions include: Section 17 Exempt accommodation expenses for living away from their usual place of residence in order to perform work duties. (note this does not fall under 15-2 either), although for FBT purposes it must be put in a declaration form.
Exempt car expense reimbursements – not applicable although included under section 15-70, unless they form part of division 2 car expense Non-private use declaration – basically it is a declaration that states that the expenses listed below are solely for the purpose of business and not private use so will not be taxed on FBT. Distance travelled benefits – although these would be considered to be assessable income. Reductions: Otherwise deductible rule (just do a % of the taxable value) Recipient contribution (just minus from the Taxable value) Division 14 related items. Division 11: Property fringe Benefit.
A property fringe benefit arises when an employer provides an employee with property either that is free or at a discount. These include items such as – All goods (e. g. items of clothing) – Real property (e. g land and buildings) – Other property (e. g. shares) Exemptions include: Where the property is consumed on a working day at the place of business. Excludes cars Division 13 – items H and Y The taxable value of the fringe benefit depends on whether or not it is: In-house: Benefits that the employer usually sells in the ordinary course of their business: Refer to pg.
1490 of my text book to look at the rates for different items…. But if it is a physical good generally we take the 75% of the value over $1000. As items under $1000 are FBT exempt. External: basically not in house: this calculation is basically the cost of the item less any contributions. Division 12: Residual fringe Benefit This is any other fringe benefit that is not subject to any of the other categories that we have mentioned. Examples include: Use of employers property (e. g. a video camera or tv) Provision of a service (e. g. Advice given by a solicitor).
Private use of a motor vehicle other than a car (e. g. bike or truck) Exemptions include: Where you have a no-private use declaration form Division 13 ; 58Z exempt taxi benefits. Capital Gains Tax (Division 100) Capital Gain (introduced 20th September 1985): This is a tax on: A) Property or B) A legal or equitable right that is not property This tax is only applicable for resident assets located anywhere in the world. A foreign resident is only subject to CGT on taxable Australian property. Typically in the case of land or business assets. Important Dates >= 20th September 1985 = CGT applies.
< = 21 September 1999 (you could only index the gain) > 21 September 1999 (may index or use discount method A gain forms part of assessable income, although a loss does not become a deduction; it can only be offset against a future gain. Division 104: CGT events and their Exceptions (e. g. disposal was acquired before 20 Sep 1985) Division 108: CGT assets Division 118: Exemptions – general and specific (e. g. main place of residence) Examples of CGT events: Land and building Transferring an asset from one person to another (not applicable if upon death) A company makes a payment (not a dividend) (G1 event).
Selling of shares Disposal of Assets (A1 event) Premium for changing a lease (F5 event) A asset is lost or destroyed (C1 event) Depreciating assets used for private purposes. Options Debts owed to you A right to enforce contractual obligations (restrictive covenants) Foreign currency Disposal of CGT Assets – (Event A1) – Main type of CGT event (pg67 James Cooper book) What are CGT Assets – Land and buildings – Shares in a company – Options – Foreign currency – Debts owed to you A right to enforce contractual obligations (restrictive convenant).
Specific rules for certain CGT assets 1. Collectables – paintings, jewellery, coins, antique, drawing, sculpture, postage stamps, books, interest in or option to acquire any of the above, debt owing for any of the above. Mainly for personal use and enjoyment – Only applicable if bought for >$500 on or after 1 july 1995 – A capital loss under collectables can only be offset against other collectables. – Ownership costs never included in cost base 2. Personal Use assets – clothing, furniture, sporting equipment, electrical appliances, white goods, boat.
Purchased mainly for your personal use and enjoyment – Only applicable if bought for >$10,000 – Losses cannot be offset against anything and are disregarded – Ownership costs are not included in the cost base 3. Separate CGT assets – land, buildings, structures (not applicable though) Timing: the CGT event occurs when the contract is entered into and not when the money is received. Important for….. 1. Determining which tax year we include this in 2. Is it pre CGT event 3. Does the discount method or indexation apply. Exceptions To Event A1 (Section 104-10 pg 439 of act) Pre-CGT event regarding an asset or a lease.
There is no change in beneficial ownership – you stop being the legal owner but you still remain a beneficiary (event E2) Due to Bankruptcy or liquidation There is merely a change in trustee these come under other CGT events, and not under event A1 Assets specifically exempted (118-A) Gambling’s 118-37 Financial Arrangements Termination payments and superannuation lump sums118-22 Trading stock 118-25 Depreciating assets118-24 Compensation for damages or injury 118-37 Cars and motorbikes, decorations of Valour (not boats)118-5(a) Collectibles ($1000 separated into two cost pools General Small business Pool:
Effective life 25years Deduction rate 2% first year & 5% thereafter From 1st July 2012 and beyond Items costing less than $6500 immediate 100% deduction. Items >=$6500 are automatically pooled into one cost pool known as, “General small business pool”. Rates are 15% first year & 30% thereafter Where a cost pool from 2011 enters into the 2012 we just simply add the pools up to get our consolidated cost pool. Disposal of cost pool items Unlike normal business which have to use a balancing adjustment event all we do is simply deduct the sale value from the cost pool until it reaches zero.
If we have any excess then this amount forms assessable income. Calculating closing balance cost pool Opening balance pool + Any purchases (we don’t add items bought with immediate deduction) – immediate deductions – current year deductions of assets using applicable % rates Sole Trader Advantages – Inexpensive to establish – If income low, pay low tax; if high pay top marginal rate – May be eligible for 50% discount or other small business concessions – Business losses can be offset against other income (division 35 – specific deductions) or carried forward.
Disadvantages -All assets available to creditors -No income splitting -taxpayer cannot be an employee so you cannot pay yourself or salary sacrifices. Partnerships Advantages – Less costly than a company – Can provide some flexibility through partnership agreement – Income splitting allowed – Partnership loses are distributed to the partners Disadvantages – Partnership is jointly and severally liable – Income cannot be accumulated must be distributed to partners – Partners cannot be employed.
– Partners cannot claim a deduction for interest on borrowings – Complications for CGT – if you have 2 existing partners and a third partner comes in each person needs to distribute 1/6 of their assets to the third person in order to achieve 1/3 ownership all way round. Whole Definition of partnership: “An association of persons carrying on a business (excluding companies) as partners or in receipt of ordinary income or statutory income jointly” Statutory Partnership:
Persons are in receipt of ordinary income or statutory income jointly are technically considered partners for tax purpose e.g. joint owners of property who share income (TR93/32) In terms of the tax ruling above for tax purposes, income is taxed based on your ownership interest and not what your partnership agreement states. Whereas under common your individual tax basis is based on how your partnership agreement splits your profit up (no partnership return required) Common Law Partnership: (our main focus) Persons carrying on a business in common with a view to profit – partners have the right to distribute net income and losses as per the partnership agreement.
Macdonald case: This case talks about distinguishing between common law partnership and statutory partnership with relation to owning income producing property. Basically the taxpayer and his wife owned property jointly and they tried to claim income at different percentages. It was held that they weren’t carrying on a business in the view of profit and so income was based on ownership interest. How to Determine Common Law Partnership Based on a question of fact (TR94/8)(Excludes joint venture) Joint ownership of business assets Joint bank accounts Registration of business name Business records.
Sharing or profits and losses Public recognition of partnership Extent of capita invested Don’t need a written agreement but it is advisable. Taxation of partnership (s. 91) The partnership itself doesn’t pay income tax, but through s91 ITAA36 it is required to lodge a partnership tax return. Net Income (S90 ITAA 1936) – Net income for partnerships is assessable income less allowable deductions with minor modifications. Partner share of Net Income (s. 92) – Each partner is taxed on their share of the partnership net income or net losses distributed to them based on the partnership agreement.
For example if partnership makes $100,000 (2 partners) each partner gets 50k and is then assessed on that. These individual amounts are then included in the individuals tax returns. Modifications to the calculation of net income: Partnership Losses A partnership cannot carry forward losses with the partnership net income – it must be distributed through to the partners and then they can carry forward any losses if applicable. Superannuation Partners personal superannuation contributions cannot be claimed as a deduction for the partnerships net income; only contributions made to their employees.
Partners can only claim their super contributions in their own taxable income statements. Example. Net income partnership is 155,000 Superannuation: Employees ($7,000) ; partners: ($22,000) Partnership net income: 155,000- 7000 = $148,000 Taxable income for each partner is then $74,000 – $11,000 = $63,000 Salaries paid to partners There is no allowable deduction (case S75 85 ATC) TR 2005/7: Partners generally share profits which are done through a partnership salary. Although this is not a true salary as you cannot deduct it; it is merely used to distribute partnership profits based on contribution to that of the partners.
Example Partnership net income $50,000 Salary to jim ($20,000); salary to john ($15,000) Remaining partnership income that needs distributing equally: 50 – 20-15 = 15,000 Distribution Statement: Jim $27,500John $22,500 = $50,000 (total partnership income) Interest on Capital/ Drawings (not PNI deductible) Generally partner’s share of profit are transferred into their respective current account (this is used to calculate total net income of partnership) Where interest is paid on the capital or current account this is treated as an apportionment of profit and not deductible.
Why partnership is treated as a distinct entity from its partners. Interest charged on drawings (overdrawn current account) is not taken into account in the calculation of s. 90. However it is taken into account for when distributing out net income. FCT v Beville case: This is what this case talks about. Example Partnership net income $50,000 Salary to jim $20,000 Salary to john $15,000 = 35,000 Total salary Interest on capital jim $2,000 Interest on drawings $1000 Remaining partnership income that needs distributing equally: 50,000 – 35,000 – 2000 + 1000 = $14,000 to distribute out Distribution Statement: Jim $29,000 (20,000 + 7,000 + 2,000) John $21,000 (15,000 + 7000 – 1000).
Total distribution = $50,000 Bona Fide Loan (deductible) Loans between a partnership and its partners are generally referred to as an advance. These are considered when determining net income of partnership s. 90. Loan can be between: By a partner to the Partnership By the partnership to the partner Interest paid on advances: Interest paid is an expense and deductible Interest Received on advances: Interest received is income and form apart of partnerships net income.
Example pg225 jims book Partnership net income $50,000 (50:50 split) Interest paid on advance from Vishnu $4,000 – (this is saying the partnership got a loan from one of their partner members of 4K) Partnership net income: 50,000 – 4000 = $46,000 (23K each partner) Assessable income of individual partner Jim: $23,000 + 4000 = $27,000 John: $23,000 Total: $50,000 Assignment of Partnership Income (IT2330 – income splitting) Assigning your income in the underlying share was held effective to split income for taxation purposes.
FCT v Everett: The taxpayer assigned 6% of his 13% partnership interest to his wife. It was held that the taxpayer would only be assessed on the 7% and not on the 13%. To be effective:(Called Everett Assignment) – The assignee may not interfere in the management of the partnership – The Assignee rights are limited to sharing in the partnership profits. However there are CGT implications of doing this know. This case occurred prior to CGT events. (IT2540) – When making a Everett assignment we are disposing of ownership interest in a property and hence there must be capital implications on this.
FCT v Galland: Because of the CGT implications of Everett assignment most people tend to assign part of their partnership interest into a discretionary trust, and income is then distributed accordingly. Note: If assigning based on any of the cases listed above it doesn’t matter when the assignment is made, the income will be based on the whole year and not when the assignment made because partnership accounts are not taken until the end of the financial year. Partnership Dividend Imputation Where a partnership receives a franked divided (i. e. dividend with tax taken ou